Why More Americans Are Escaping Unmanageable Debt Through Bankruptcy

Although bankruptcy filings in the United States have yet to reach the same levels seen after the 2007 recession, they’re on the rise. In 2025, courts reported 549,577 personal bankruptcy filings, which amounts to an 11.2% increase from the previous year. Many Americans are finding that budgeting and refinancing aren’t enough to resolve their debt. Thanks to the rising cost of living, student loan payments, and medical debt, people with limited savings aren’t able to recover from what would have only been a small setback several years ago. 

Typically, people file for bankruptcy after many months or years of financial struggle. For instance, someone might file for bankruptcy after they’ve burned through their savings account and maxed out their credit. However, people are reaching their financial limits much faster than in the past. The temporary relief provided throughout the pandemic is no longer available, and many people who were able to pause payments can’t catch up and are now buried in debt.

Americans Are Carrying Massive Debt

Today’s households have more debt than ever before. Many people are maxing out their credit cards to fill gaps in their budget when their regular income can’t cover necessities like groceries and utilities. Car loans are a big source of debt, and repossession is becoming more common when people need to choose between making rent or mortgage payments and taking care of their basic needs. 

Thanks to interest and fees, it doesn’t take long for debt to become unmanageable. Bankruptcy is one of the easiest ways to end this struggle. Rather than making minimum payments indefinitely while interest accumulates faster than it can be paid off, bankruptcy offers a path to real debt relief.

Two Types Of Bankruptcy Are Available

There are two types of bankruptcy: Chapter 7 and Chapter 13. Each chapter has different qualification requirements and handles debt differently.

Chapter 7 bankruptcy involves liquidating assets to pay off creditors. A trustee is appointed to distribute the debtor’s property with a few exceptions. Personal items, along with a person’s home and car, are usually exempt. Once all non-exempt assets are sold to pay back creditors, the rest of the eligible debt is discharged, and creditors can no longer attempt to collect on those debts. However, some debts can’t be discharged, like most taxes, student loans, alimony and child support, and court fines. 

Chapter 13 bankruptcy reorganizes a person’s debt to be repaid over three to five years. This chapter is for people who earn a regular income and can afford to pay back their debts. In most cases, people who file under Chapter 13 can keep their property. This option makes it easier to pay back debt because it creates smaller payments. 

In either case, getting approved for bankruptcy will put an immediate stop to collections, and Chapter 13 can be used to save a home from foreclosure as long as payments are made regularly.

High Credit Card Rates Make Debt Difficult To Resolve

When people carry balances on their credit cards, it gets incredibly hard to manage debt. The average credit card interest rate was 20.94% as of May 2026. That means a balance of $5,000 can cost around $87.25 per month if that full balance is carried forward. Many people are seeing most of their monthly payments get absorbed by interest alone without reducing their balance. At some point, it becomes unrealistic to continue making monthly payments, and bankruptcy is the only solution that will allow someone to get out from under their debt. 

Student Loan Debt Eats Into Available Funds

Student loans are a major source of household debt in America. As of the second quarter in 2026, student loans were estimated to total $1.65 trillion. Many people have found that paying their student loans means they don’t have enough money to pay for housing, food, and transportation. Unfortunately, student loans aren’t usually discharged through bankruptcy. However, getting other debts discharged can free up funds to make it easier to make those student loan payments.

Housing Costs Are A Major Contributing Factor

Today, 49.7% of renters spend more than 30% of their income on housing. Since rent usually comes first, that means people are using their credit cards to handle other important expenses. Housing costs are also rising for homeowners in the form of insurance rate hikes, higher property taxes, and more expensive repairs.

Bankruptcy Offers A Financial Reset

Most people never expect to be consumed by debt, but it happens. Filing for bankruptcy can provide a financial reset when debt becomes unmanageable. Not everyone will qualify, but for those who do, bankruptcy can provide a way to get relief and rebuild their finances.

Photo by Sasun Bughdaryan: Unsplash