Personal Bankruptcies Are Increasing: When Should You Consider Filing?

Filing for personal bankruptcies is a tough decision, but delaying it can make financial troubles worse.

Bankruptcy filings remain below pre-pandemic levels but have risen sharply in the past year. In October, personal bankruptcies increased by 16% compared to the same time last year. More Americans are turning to bankruptcy for relief. Experts urge those facing debt to consider it sooner rather than later.

Why Do People Wait to File?

“Consumers in financial distress rarely prioritize bankruptcy,” said Michael Hunter, vice president at Epiq Aacer, a partner of the American Bankruptcy Institute (ABI). Most people wait 18 to 24 months after hardship begins before filing.

Decades of research show this trend. Interviews with thousands of filers reveal that two-thirds endure financial struggles for up to five years before seeking relief.

Robert Lawless, a law professor at the University of Illinois and co-investigator for the Consumer Bankruptcy Project, confirmed this pattern. “People often wrestle with debt for over two years before considering legal options,” he told CBS MoneyWatch.

Misunderstandings About Bankruptcy

Many delay filing due to misconceptions about bankruptcy. Lawless said this often leads to worse financial strain. “Seeking help earlier can save people unnecessary hardship,” he explained. Lawless, a founding member of the Consumer Bankruptcy Project, emphasized the need for awareness about bankruptcy’s benefits.

Signs It’s Time to File

The stigma surrounding bankruptcy makes many see it as a last resort. This hesitation often leads people to use up retirement savings or other protected assets. Filing could preserve these funds.

“Dipping into retirement accounts is a major warning sign,” Lawless said. These accounts are typically safe from creditors in bankruptcy. Borrowing money for daily expenses is another red flag.

Pamela Foohey, a law professor at the University of Georgia, advised filing if creditors threaten essential assets like a car or home. “Bankruptcy can protect you from wage garnishments, repossession, or losing your home,” Foohey said.

Both experts stressed addressing the root causes of financial trouble. “Bankruptcy clears debt but doesn’t solve ongoing financial problems,” Lawless noted.

Timing also matters. Foohey suggested filing after resolving life changes, such as starting a new job, recovering from illness, or adjusting to family changes.

Types of Bankruptcy: Chapter 7 vs. Chapter 13

Most filings fall under Chapter 7 or Chapter 13.

• Chapter 7: Costs about $1,500 in upfront attorney fees. This process discharges debts in 3 to 6 months by selling nonexempt assets. However, 95% of cases don’t involve selling anything, according to Lawless.

• Chapter 13: Spreads payments over 3 to 5 years and costs about $4,500 in attorney fees. These fees can be included in the repayment plan. Many choose Chapter 13 to catch up on mortgage payments.

Foohey explained that Chapter 13 can help save homes, but Lawless warned some opt for it only to afford legal fees. He suggested Congress allow Chapter 7 fees to be paid over time to avoid this problem.

Explore the best time to file for bankruptcy, how it can protect your assets, and the differences between Chapter 7 and Chapter 13 filings.

Bankruptcy Trends Post-COVID

Before COVID-19, about 750,000 people filed for bankruptcy each year. Filings dropped sharply during the pandemic due to government aid, stimulus payments, and loan forbearance.

Michael Hunter of Epiq described the drop. “Bankruptcies fell to less than half of pre-pandemic levels due to financial support programs,” he said.

As aid ended, household debt rose, but filings didn’t surge. Lawless expects filings to return gradually to pre-pandemic levels. By October 2024, nonbusiness bankruptcies reached 405,132.

“We’re still far from 2019 levels,” Foohey said. However, the trend points to a slow return to normalcy after pandemic disruptions.

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