The number of Americans considering bankruptcy is soaring to its highest level since just before the pandemic, a potentially alarming sign as clouds gather over the economy.
Personal bankruptcy inquiries surged in the first three months of the year, according to data from LegalShield, a provider of consumer legal services. The jump could augur a potential wave of bankruptcy filings as consumers start to buckle under a record level of debt and as tariffs fuel inflation, the company warned in a report this week.
Personal bankruptcy filings in the U.S. averaged about 750,000 a year before COVID-19, but fell sharply during the pandemic itself as Americans were buoyed by trillions of dollars in government aid and relief.
LegalShield now expects bankruptcies to surge as soon as this this summer. “Consumers are calling lawyers to ask questions because they can’t pay their bills or are having trouble, and they ask about the process of filing for bankruptcy,” Matt Layton, LegalShield senior vice president of consumer analytics, told CBS MoneyWatch.
Why are more Americans mulling bankruptcy?
Heavy consumer debts, years of stiff inflation and higher interest rates are squeezing Americans’ budgets, according to Layton. Billing disputes, debt collections and other leading indicators of bankruptcy are also on the rise.
“Our members are calling and saying, ‘I don’t have enough money at the end of month to pay my bills.’ They’re asking which ones to pay and which ones to put off. They’re saying, ‘They’re coming to get my car — what can I do about these things?’” Layton said.
The jump in Americans who are considering declaring bankruptcy reflects the tough economic economic and financial conditions that have prevailed 2020, experts said. Total household debt as of the end of 2024 hit an all-time of $18 trillion, while the percentage of Americans falling seriously behind on their debts also rose last year, according to the Federal Reserve Bank of New York.
“Quarterly filings from the U.S. courts will come out soon, and I’d expect to see a quarter-over-quarter increase in personal bankruptcy filings from the end of 2024 to the beginning of 2025,” Pamela Foohey, a bankruptcy professor at the University of Georgia School of Law, told CBS MoneyWatch.
“I am not surprised attorneys say they’re hearing from people who are looking to file for bankruptcy now because it’s April. This is when people get their tax returns, so they have money to file for bankruptcy with,” she added, noting that it costs money to file for Chapter 7 bankruptcy, the most common type of personal filing. “If they are getting their tax return, that’s the time to file because they have an infusion of money.”
Economists warn that the Trump administration’s economic policies, including heavy tariffs on China and other key trading partners, is likely to stoke inflation while dampening economic growth. Still, the flood of people weighing bankruptcy now reflects the steady rise in financial stress in recent years rather than current economic conditions, Foohey emphasized.
“Rising [bankruptcy] filings will show that people have been struggling with their finances for years when they do file, and things have been getting incrementally worse month after month now for years,” she said. “It’s been building, and it’s only going to get worse unless something is done about inflation, unless something is done about tariffs.”
When should you file for bankruptcy?
As Foohey notes, bankruptcy typically comes after a prolonged period of financial stress. Although some Americans struggle to overcome the stigma of bankruptcy, experts recommend filing for protection sooner rather than later in order to shield their assets from creditors.
Filing for bankruptcy can help an individual liquidate their assets to pay off their debt or create a repayment plan. Individuals may file for file Chapter 7 or Chapter 13 bankruptcy, and all bankruptcy cases are handled in federal courts.
But bankruptcy expert Robert Lawless, a professor at the University of Illinois Urbana-Champaign College of Law, said declaring bankruptcy accomplishes one thing: wiping out people’s debt.
“It doesn’t get you a job, it doesn’t get you a raise, it doesn’t put money on the table,” he said. “Filing for bankruptcy protection doesn’t make sense when things are still on the way down. It makes sense to file when you’re in the hole, but starting to climb out of it.”
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