The Surprising Truth About Rising Bankruptcies

If you haven't read the data recently, it appears that the level of personal bankruptcies here in the United States is on the rise. Pleasure to be joined by Wharton Associate Professor Sasha Indarte to talk about why this is occurring and how people should prepare if maybe they think about this as an option. Sasha, great to talk to you again. How are you today? Great, Dan. Thanks for having me here. What is it that is going on right now that is maybe seeing us develop a higher level of bankruptcies? So just to put some numbers on it, some of the most recent data from past

months is showing that consumer bankruptcies, so not businesses, but individual households, people filing for bankruptcy, it's risen about 12% year over year relative to the previous year. What's going on here? Well, I'm not aware of research that gives us a definitive causal decomposition, but I can talk about some data points and plausibly what's happening. I would say it looks like there could be two things. One is this might be kind of a normalization, returning more to normal. What I mean by that is that if you compare the most recent June 2026 consumer bankruptcy numbers to the same time period pre

-COVID, that is in June of 2019, bankruptcy is actually lower. So it's about 580 cases that were filed year over year as of the most recent June, whereas it was closer to 750,000 in that corresponding period pre-COVID. So historically, bankruptcy levels are not high. If anything, they're a little on the low side, but this is an increase relative to the big decline in bankruptcy that we saw after COVID. Please go ahead. Well, I was going to say, it is still something that is a challenge for a person in terms of making that type of a decision of whether to file for that bankruptcy or not, correct?

Absolutely. So this decision, and this is something I've heard both when people talk about their experiences with bankruptcy, there's also research that speaks to this, but a couple of things that hinder and make this a challenging decision is, well, one of them is just stigma. There's this social norm that when you file for bankruptcy, it can feel like a kind of failure. It can feel like you're breaking a promise and you are literally in a sense writing checks that you couldn't make good on. Then another complicating factor is the legal system is not easy to navigate. And while many filers do hire an attorney, that's expensive.

That can create another barrier to successfully filing for bankruptcy. And recent work by Ray Klunder and co -authors has found that people have a lot of misconceptions and misunderstandings about the bankruptcy system. And that's actually one reason why it can account for a lack of filing that we observe. So is there any correlation between the bankruptcies that we're seeing now and how the U .S. economy is doing at the moment? So there tends to be correlation, but I would caution using personal bankruptcies as some kind of macroeconomic indicator. Just to give like one recent example, the COVID experience.

At the time when unemployment was surging to unprecedented levels, we saw a decline in people filing for bankruptcy. Now, researchers think that this was mainly due to the really strong financial support that was part of the response to COVID. Things like expanded unemployment insurance benefits, stimulus checks, the evictions and foreclosure moratoria. Also, people getting a pause on student loan payments or even mortgage payments through government-initiated forbearance measures. So consumers are getting a lot of essentially financial relief from other measures.

And that might have allowed people to avoid turning to bankruptcy for that financial relief. So our point is, it's not a perfect way to take the temperature of the economy. But because a lot of people, I would think, believe that if you are going to file for a bankruptcy, that that's probably the last step that you've exhausted a lot of the other options before you go to that as the potential last step. I would say that does look to be consistent with what we see in the data. But I like to think of both as a last step and a first step. So a last step in the sense that

oftentimes consumers are running down their savings. They don't immediately file when they lose their job or when they have a major illness or these other events that tend to prompt bankruptcy. But a lot of times people try to avoid it. My own research shows that people are extremely reluctant to file for bankruptcy. Now, the first step part is that bankruptcy, it's intended to be a kind of fresh start. The idea is to wipe the slate clean. If you got into debts that ended up being unmanageable, it's supposed to give you a chance to start fresh again, too. Do people sometimes not want to file for bankruptcy?

Because I assume there's a belief that not only is that a last or first step, but it could have potentially an impact on one's credit score. Absolutely. So in addition to things like stigma and the legal complexities, there can also be potentially other costs to people of filing for bankruptcy that can deter them. So like you mentioned, your credit score. Now, most people that end up filing for bankruptcy, these aren't people with pristine credit scores. And what we see in the data is your credit score does fall after you file for bankruptcy, but in percentage terms, it's not a huge decrease. And getting rid of that debt and starting to successfully manage your remaining financial obligations, we

see that people that are very distressed and those that file compared to those that have financial distress and don't file, once they file for bankruptcy, they have better credit scores within a few years. And this is conjecture, but something that I suspect is that people might underestimate the persistence and harm on their credit score. Because you don't want to think about someone with perfect credit versus a bankruptcy filer, but someone that is very distressed. So if somebody's making that decision, what is the process like and what are the potential impacts that they might see occur as they're kind of going through that process to try

and write their credit? So when someone's going through the bankruptcy process, they have to submit a bunch of paperwork, essentially documenting their assets, their liabilities, their income, their expenses. Oftentimes people do hire a lawyer because it can be difficult to navigate the bankruptcy process. And there's a risk that your case can be thrown out by the court if you're not correctly reporting this kind of financial information. So having that lawyer to make sure that you're doing everything correctly is something that can help you avoid that kind of risk. There are also requirements to do financial education,

financial literacy courses as part of bankruptcy. There's court fees that you have to pay in addition to the lawyer that you're hiring. And the whole process can take, you know, it's not a trivial amount of your time. It can take three months total. Usually there's at least like one meeting with a legal official, if not more. So it can be a time-consuming, costly process. But at least for Chapter 7, within three months, you can have the slate wiped clean. With Chapter 13, I should add, that's a much more long-lasting process where you're on a repayment plan for typically three to five

years before you get debt forgiven. And so kind of reinforcing something you said before, because this has the opportunity to lead a person to clearing off those debt obligations, better credit score down the road. This really can be a good option for people at times. Absolutely. I like to think of bankruptcy as a kind of insurance. It's, you know, like car insurance, you don't want to have to use it. You don't want to get into an accident, but sometimes, sometimes you do. And when that happens, if you get into a financial accident, it's nice to have that

kind of insurance to turn to. And this is a part of how we've built the U.S. financial system. We want people to repay debts when they're able to, but we want a kind of economic safety valve when people get into situations where it's just not feasible for them to repay their debt. Sasha, great to talk to you today. Thanks very much for your time. Thanks, Dan. Sasha Indarte, Wharton professor, joining us here on the show.