More than 500,000 Americans filed for bankruptcy in 2025, a nearly 50% jump from 2022 levels, and the numbers keep climbing. June 2026 filings rose 12% from a year earlier as consumers struggled with bills, according to a business school professor who has studied bankruptcy outcomes for years.
The professor’s interest in the subject began in graduate school, but not from coursework. He ran out of money after his wife unexpectedly lost her job at the exact moment their savings hit zero. They avoided bankruptcy, but the near miss shaped his research.
How bankruptcy works and what it can’t fix
Bankruptcy is a legal process for people who can’t pay their debts. It usually requires liquidating assets or entering a repayment plan, which is why Americans treat it as a last resort. Filing begins with a petition to a federal court, which appoints a trustee to oversee the case.
Not all debts disappear. There are 19 types that bankruptcy won’t wipe out, including alimony, child support and most taxes. Student loans can be discharged, but it’s difficult and not automatic.
The law has two conflicting goals. The first is giving honest debtors a “fresh start” by reducing enough debt to resume normal financial life. The second is ensuring creditors recover as much as possible. In 2024, filers held about $75 billion in assets but owed roughly $86 billion — an $11 billion gap.
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States make different trade-offs between those goals. Texas doesn’t limit home equity protection at all, while Arkansas caps it at $800 and Kentucky at $5,000. Vehicle and property protections vary just as widely.
Chapter 7 versus Chapter 13
About two-thirds of filers use Chapter 7, which liquidates possessions beyond exemptions. A trustee sells assets and pays creditors, and in exchange, most debts are wiped out. Chapter 13 applies to moderate and higher earners with debts under $2.75 million — it spreads payments over three to five years from future earnings, letting people keep homes and vehicles.
The recent surge follows a long decline. Annual filings hit a low of about 368,000 in 2022, down from 1.5 million in 2010. A 2005 law called the Bankruptcy Abuse Prevention and Consumer Protection Act drove that earlier drop by making filing harder and more expensive. It added income limits for Chapter 7 eligibility and required credit counseling before filing.
One study found the law lowered credit card interest rates but also prevented some uninsured people from wiping out medical debts. The Great Recession pushed filings back up, then they fell again until 2022 as stimulus checks and expanded unemployment benefits kept millions afloat during the pandemic.
Rising inflation and sharply higher credit card interest rates have driven the current increase. Filings began climbing in 2022 as incomes failed to keep pace with costs.
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Recovery takes longer than the credit report suggests
Bankruptcy stays on a credit report for up to 10 years. After that, creditors are supposed to treat filers like anyone else. But research the professor conducted with law professor Lois Lupica tracked two decades of financial outcomes and found the reality is more complicated.
The average person who filed for bankruptcy eventually caught up financially with peers who hadn’t. That’s the good news. The bad news: it took 15 to 25 years to recover across most financial dimensions — longer than the law’s stated intent suggests.
That gap between the legal timeline and the actual recovery period is worth keeping in mind for anyone considering whether bankruptcy is the right path. The fresh start comes, but it’s slower than the law promises.
The professor’s own strategy for avoiding bankruptcy was simple. He and his wife switched to cash for daily purchases — when wallets were empty, spending stopped. They also contacted the financial company holding their biggest monthly payment, and after proving hardship, found the company surprisingly flexible. For those beyond that point, he recommends consulting a bankruptcy attorney, noting that filing is not something most people should attempt alone.