Is bankruptcy really all that bad?

0:00NPR

0:05Everything you know about bankruptcy is wrong. Which is a bold claim, but may not be far from the truth. I mean, when a lot of people hear the word bankruptcy, there's a good chance that the image that pops into their mind first is a business. Toys R Us, Blockbuster, Bed Bath & Beyond. But the truth is, the overwhelming majority of bankruptcies are personal bankruptcies. Yeah, if you are talking bankruptcies, you are most likely talking about people. Regular people like Rebecca Leslie. My utility bills are going up. The groceries are going up. Gas is going up. Like everything just kept getting to that point where it was like, I can't save anything anymore.

0:45I'm out of savings. So earlier this year, Rebecca filed for bankruptcy. At first, you know, I was kind of embarrassed, you know, in a way like I feel like I was failing. And this embarrassment Rebecca felt about bankruptcy, it's common. But bankruptcy economists and lawyers will tell you it's not game over. It's also not a label, like, say, being broke. Instead, bankruptcy is a legal option, one that people choose. And it's a choice those researchers say more people should be making. This is The Indicator for Planet Money. I'm Adrian Ma. And I'm Stephen Massaha. On today's show, we dispel myths about this maligned indicator and learn what bankruptcy can tell us about the economy we all live in.

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2:22Learn more at fisherinvestments.com. Investing in securities involves the risk of loss. This message comes from NPR sponsor, Charles Schwab, with its original podcast, On Investing. Each week, you'll get thoughtful, in-depth analysis of both the stock and the bond markets. Listen today and subscribe at schwab.com slash oninvesting or wherever you get your podcasts. Bankruptcy is usually a last resort, meaning that people who file for it have been under the weight of debt for a long time. Yeah, that's true for Rebecca Leslie. Three years ago, Rebecca was living in her sister's home just outside Oklahoma City, and her sister offered to sell her the house.

3:02This is a house that I've put a lot of work into, redoing the original hardwood floors, all of that. I was so excited. Rebecca would only have to cover$55 ,000, just what's left on the mortgage. It seemed like a great deal, but then... I lost my job the same month that I bought my house. So with a new mortgage and no income, Rebecca started applying to hundreds of jobs. Literally hundreds of jobs. And I couldn't even get interviews or I could barely get rejection emails. She eventually found a job. But six months without income caused her debt to grow bigger than she could control. I was looking at, like, losing my house.

3:43Like, I was really panicking and kind of freaking out a little bit. That's what led Rebecca to consider bankruptcy. Bankruptcy, at the end of the day, is a legal path towards debt relief. And more immediately, it can be a path towards stress relief. That is what Mary Escherbach Hansen says. She is a bankruptcy economist with American University. Possibly the biggest benefit. All your creditors then have to stop harassing you. Mary says just filing for bankruptcy stops creditors' attempts at collecting from you. And also they're harassing phone calls, right? and then gives you some time to figure out what legally is going to happen, for the court to figure out what legally is going to happen to your debt.

4:29What can happen could be a repayment plan, possibly selling off some assets, maybe even getting some debt wiped away. Now, one drawback to bankruptcy is that it can hurt your credit history. Look, if you need to file for bankruptcy, your credit score is probably already in pretty rough shape. Fair. There's not much of a long-run negative consequence of using the bankruptcy law. After a few years, you can get new credit again. In other words, your credit score could actually be better post-bankruptcy. But there is a more immediate challenge. You'll likely need to hire a lawyer. Filing for bankruptcy is complicated, and you also need to prove to the court that you can't pay off your debt.

5:08That can be really difficult without a bankruptcy lawyer's expertise. Yeah, the cruel irony here is that people often have to save up for a lawyer to go bankrupt. Rebecca Leslie made a Facebook post asking her friends to help find a lawyer, and she was surprised by how many people related. I had, I don't know, probably four or five people within the hour messaging me like, hey, this is who we use. In fact, last year, about 1 ,500 bankruptcies were filed every day, according to U.S. courts. Then I had people also asking me, like, hey, when you go through with it and you talk to them, will you please let me know how it goes?

5:43Because I'm considering the same thing. Personal bankruptcy filings have been climbing. Last year, they were up nearly 11 percent from a year before. But if you take a step back, they're actually pretty low by historic standards. If you charted this out over the last 20-ish years, you'd see bankruptcies shoot up after the Great Recession, slowly come down after that before plummeting during the pandemic. To find out what all this means, we called Bob Lawless. He's a professor of law at the University of Illinois. I got to ask, what is your go-to spiel when people ask you about Bob Lawless, professor of law?

6:20It's the only reason students take my class to see if I'm a real person or a jolly joke from the university. So how does Bob explain the last 20 years? In particular, that sharp fall in bankruptcies during the pandemic. People forget. So during the pandemic, there are a lot of predictions that bankruptcies would soar and skyrocket or a tidal wave or whatever metaphor you wanted to use. None of that came true. Bankruptcies plummeted. It was like turning a switch. Between 2019, so before the pandemic, and 2021, more than a year in, the bankruptcy rate was nearly cut in half. And this can be traced back to the interventions the federal government made at the time.

6:57Things like stimulus checks, expanded unemployment benefits, moratoriums on evictions. So there was just less demand for bankruptcy. So bankruptcies hit close to historic lows. That expanded safety net has long since been shrunk back down. But it's taken a while for that to show up in the bankruptcy rate. That's because it's a lagging indicator. It can be years between the start of debt problems and actual filings. Now, generally, bankruptcies are not a great economic indicator because they represent an extreme. Just like how the number of billionaires doesn't tell you how the overall economy is doing, neither does looking at just families on the financial edge.

7:36And because of the stigma around bankruptcy, only a fraction of people who could benefit from it actually file. Other indicators like gross domestic product and the jobs report give us a better sense of the economy as a whole. Bob says the bankruptcy rate can also tell us a completely different story from the overall economic picture. You go back to the late 90s, the economy was doing great and bankruptcy filings were at all-time highs. To understand this, it helps to think of a social safety net program like SNAP, Supplemental Nutrition Assistance or Food Stamps. You might think that it would be a positive sign for the economy if fewer people were receiving SNAP.

8:15And that actually did happen between July 2025 and April of this year, when SNAP rolls dropped by about 5 million people. Yeah, but that was likely due to sweeping changes to SNAP caused by a Republican-led tax and spending law. In this case, fewer people on SNAP does not necessarily mean these people are better off. It's likely because they were cut off. And it's a similar thing with the bankruptcy rate. It might just be a sign that people have easier access to credit. Still, Bob says we should not ignore the bankruptcy rate, and each filing does represent a human tragedy. It helps gives us a sense of how many people have been struggling with debt for a long time.

8:57It's also worth remembering bankruptcy is supposed to be a relief. It's the solution to the problem. It's if the financial distress is diseased, bankruptcy is the hospital. Rebecca Leslie says bankruptcy has taken her debt from unmanageable to manageable. I, in a way, feel a sense of relief. Maybe this is what I needed to do to get me back into a better position and to, you know, have a little bit more financial success. Yeah, and knowing so many of her friends are in the same boat helped. When other people were telling me, you know, like, yeah, like, we just got done with this too. And, you know, it was like the best thing that we've ever done.

9:37And, you know, good luck with everything. It made me feel a lot better because I realized, like, it's nothing to be embarrassed about and I shouldn't be ashamed. Because a lot of people were also using bankruptcy, not as a game over, but a reset. This episode was produced by Corey Bridges and engineered by Sina Lafredo. It was fact-checked by Sierra Juarez. Kagan Cannon is our editor and the Indicators production of NPR.

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