In today’s economic landscape, the rising number of bankruptcy filings reveals underlying financial challenges amidst a facade of prosperity. Despite a rather low base following the pandemic, these petitions signal mounting stress as inflation continues to erode real wages. Recent data indicates stagnant job growth in 2025, coupled with renewed contractions in employment numbers and adjustments to prior month reports. As inflation escalates, the likelihood of increased bankruptcy filings appears more probable, reflecting a real strain on the economy.
This article offers a comprehensive overview of the bankruptcy process for anyone grappling with financial distress and contemplating bankruptcy. It’s worth noting that credit card companies often consent to significant write-offs if approached by a legal representative suggesting that bankruptcy might be filed. Their willingness stems from a desire to maintain favorable credit metrics, as elevated bankruptcy and default rates can unnerve investors and lead to increased financing costs.
I recall an acquaintance who boldly confronted her creditors. Living in Washington, where the statute of limitations for credit card debt is six years, she managed to navigate her financial challenges. However, those choosing this path must be cautious never to establish any new financial ties with the institutions they had previously refused to pay, as that would reset the statute of limitations clock.
By Jay L. Zagorsky, Associate Professor of Business, Boston University. Originally published at The Conversation
The number of Americans filing for bankruptcy is on the rise. In 2025, over 500,000 individuals took this step, marking a nearly 50% increase from 2022. The trend continues, with a 12% increase in June 2026 compared to the previous year, as many consumers struggle to meet their financial obligations due to rising costs.
I am a business school professor with extensive research experience in bankruptcies and their impact on individuals facing financial crises.
I first became interested in the topic during graduate school—not from coursework, but from my own financial struggles. During this time, my wife, who was sustaining our family, unexpectedly lost her job just as our savings were depleted.
Ultimately, we avoided declaring bankruptcy, and I’ll detail later the strategies we employed. This close encounter fueled my long-term interest in understanding the financial predicaments many American consumers face.
What is Personal Bankruptcy?
Bankruptcy is a legal procedure designed for individuals unable to meet their debt obligations. Usually, it involves liquidating assets or creating a repayment plan, making it a last resort for many. To initiate the process, one must file a petition with a federal court, which appoints a trustee to oversee the proceedings.
Importantly, bankruptcy does not eliminate all types of debt.
A total of 19 categories of debts are exempt from bankruptcy discharge. This includes significant obligations such as alimony, child support, and most taxes. Although student loans can be discharged, doing so is challenging and not automatically part of the bankruptcy proceedings.
Conflicting Goals of Bankruptcy Law
U.S. bankruptcy law embodies two primary, yet conflicting, objectives.
The first aim is to provide honest debtors a “fresh start.” The process is intended to significantly reduce or eliminate their debts, allowing them to manage their finances and reintegrate into economic stability. Essentially, personal bankruptcy serves to relieve the financial burden on debtors.
The second goal is to ensure creditors receive as much repayment as possible. When an individual declares bankruptcy, many creditors may not recoup their funds. In 2024, Americans who filed for bankruptcy reported around US$75 billion in assets, while their debts amounted to approximately $86 billion—a deficit of $11 billion.
Each state, along with the federal government, navigates these goals differently. Consequently, there are significant disparities in limits on equity—essentially the difference between market value and outstanding debts—that debtors can retain in their homes and personal possessions post-bankruptcy.
Some states, like Texas, offer considerable lenience. Texas bankruptcy law imposes no limit on home equity, which aids debtors in their recovery.
Conversely, certain states maintain strict regulations. In Arkansas, the home equity limit is set at $800, while Kentucky caps it at $5,000. These parameters favor creditors, enabling them to liquidate debtor’s homes while retaining much of the accumulated equity.
Additionally, the protection laws for vehicles and personal property of those declaring bankruptcy vary greatly among states.
Two Types of Personal Bankruptcy
Individuals filing for bankruptcy typically choose between Chapter 7 or Chapter 13 of the federal bankruptcy code.
Approximately two-thirds of filers opt for Chapter 7, a liquidation form of bankruptcy. A bankruptcy court appoints a trustee to liquidate non-exempt assets, using the proceeds to pay off creditors.
This chapter effectively discharges most debts, granting individuals a new financial beginning in exchange for relinquishing most of their assets.
For individuals with moderate to high income and debts below $2.75 million, bankruptcy courts typically require filing under Chapter 13.
Chapter 13 is a lengthier process in which creditors are paid over three to five years from the debtor’s earnings. This plan allows individuals to retain sufficient funds for essential expenses while directing all disposable income towards debts. Chapter 13 helps people retain homes from foreclosure and keep their vehicles.
Increasing Bankruptcy Filings After a Decline
The annual rate of personal bankruptcy filings saw a significant decline over more than a decade before the recent rise, dropping to approximately 368,000 in 2022 from about 1.5 million in 2010.
Since 2022, these numbers have steadily increased.
The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act was responsible for the previous decline, aiming to make bankruptcy more challenging and costly. Many creditors supported these reforms, believing some individuals were misusing the system.
The changes introduced income thresholds for declaring Chapter 7 bankruptcy and mandated credit counseling prior to filing to explore alternatives to bankruptcy. Additionally, a new requirement emerged: individuals must complete a financial management course post-filing to minimize the risk of future financial crises.
Interestingly, a study observed that while the legislation lowered credit card interest rates, it simultaneously hindered some persons lacking health insurance from erasing their medical debt.
The 2005 amendments significantly reduced personal bankruptcies until the onset of the Great Recession, which lasted from late 2007 to mid-2009.
This economic crisis caused a surge in bankruptcy filings. However, numbers gradually fell from 2010 to 2022 as the long-term consequences of the Great Recession subsided. The decline persisted heading into the early 2020s, aided by government stimulus checks and extensive unemployment benefits during the COVID-19 pandemic, which kept many consumers afloat.
As of 2022, personal bankruptcy numbers began to rise again as Americans faced increasing stress from wages failing to keep pace with inflation and a notable increase in credit card interest rates.
Lasting Impacts of Bankruptcy
Bankruptcy records remain on an individual’s credit report for as long as ten years. After this period, creditors are required to treat those who filed for bankruptcy like any other borrower. A study I conducted with law professor Lois Lupica tracked the outcomes over two decades for individuals who have both declared bankruptcy and those who have not. Our objective was to determine whether those who filed for bankruptcy truly managed to escape their financial situations.
The findings presented a mixed scenario. The good news was that declaring bankruptcy did not lead to a lifelong financial stigma. Individuals who filed were able to eventually catch up to their peers who hadn’t.
The downside, however, was that recovery typically took 15 to 25 years across almost all financial aspects. This duration exceeds the ten years the bankruptcy filing remains on the credit report.
In summary, while bankruptcy indeed offers a fresh start, the journey to full recovery can be protracted beyond what the law anticipates.
Strategies to Avoid Bankruptcy
My wife and I navigated our financial crisis without resorting to bankruptcy through two primary strategies.
Firstly, we transitioned to cash for most everyday purchases. Once our cash ran out, we stopped spending. I delve into this method further in my 2025 book “The Power of Cash.”
Secondly, we reached out to the financial institution responsible for our most significant monthly expenditure. After demonstrating our financial hardship, they surprisingly exhibited considerable flexibility.
If these strategies prove insufficient, the next logical step would be to consult with a bankruptcy law attorney. Many individuals can competently manage their finances, but filing for bankruptcy is best handled by a professional.
