Understanding Bankruptcy in the United States Completely

Bankruptcy is a legal process that helps individuals and businesses who are in financial insolvency, overwhelmed by debt, and need to regain control of their financial lives. Bankruptcy becomes helpful and offers a way to reduce or eliminate debts that have become too large to manage or repay. But the whole process happens under court supervision. It ensures that debtors get a fresh start and creditors get fair treatment. Bankruptcy is often viewed negatively, but it's not! It is an essential financial tool that helps protect assets and get relief when everything else fails.

Notably, the U.S. has seen a consistent rise in bankruptcy filings. Why? Here are some of the common reasons:

  • Growing financial pressure
  • Rising debts
  • Interest rates
  • Economic uncertainties

But why is this happening, and how can bankruptcy help you in reality? This guide discusses how bankruptcy can help people during financial hardships.

What Is Bankruptcy?

Bankruptcy is a legal declaration, and it states that a person is unable to repay their debts. Any person can file it in the federal courts. These courts:

  • Oversee the case
  • Appoint trustees
  • Handle the debtor's estate
  • Choose debts to discharge or restructure

The primary goal of most bankruptcy is either to liquidate assets or create a repayment plan.

Types of Bankruptcy in the U.S. (2025)

There are several types of bankruptcy filings that suit different conditions. Here are some of the most common ones:

  1. Chapter 7 – Liquidation Bankruptcy
    This is highly suitable for individuals and small businesses whose cases are less complicated. This bankruptcy plan liquidates all non-exempt assets to pay creditors and discharge the remaining debts. This means you won't need to pay anything else. In 2025, the U.S. courts saw a 15% increase in Chapter 7 bankruptcy filings.
  2. Chapter 13 – Wage Earner Plan
    This is for individuals earning a steady income who prefer to retain assets and reorganize debt over 3–5 years. These filings see moderate growth, but they remain less common than Chapter 7.
  3. Chapter 11 – Reorganization
    This is for corporations and large businesses that have big numbers and complexity in their cases. Chapter 11 allows them to restructure debts without pausing their operations. Corporate filing is rising, but very little compared to the above two. However, experts consider them significant. This is especially true in sectors that are highly affected by economic downturns.

Other Chapters:

There are some other chapters, such as Chapters 9, 12, and 15, that serve specific groups such as:

  • Municipalities
  • Farmers
  • International insolvencies

The numbers for these bankruptcy filings are also rising. But they are generally lower than Chapter 7, 11, and 13 filings.

Recent Trends and Statistics in U.S. Bankruptcy

We all know that bankruptcy filings are rising. But how much? Here are some data from the U.S. Courts:

  • The total bankruptcy filings were 276,126 in the first half of 2025 (10% higher than the previous year).
  • Individual filings rose by 11%.
  • Chapter 7 filings have increased by 15%, hitting 163,219 in six months.
  • Chapter 13 filings grew by 3% and hit 97,125 in the same period.
  • The annual total number of bankruptcy filings in the year ending June 2025 was over 542,000 (11.5% higher than the previous year).

The rise in bankruptcies is due to the following:

  • High credit card debt
  • Interest rates
  • Renewed student loan collections
  • Economic uncertainty
  • Inflation
  • Job market instability
  • Personal emergencies

All these figures show how financial pressure is rising on Americans.

How Does Bankruptcy Work?

Bankruptcy works in multiple steps. When you file it, you start a legal process. Here's how it works:

  1. Credit Counseling: You must receive credit counseling within 180 days before filing.
  2. Filing the Petition: You must include a detailed financial disclosure in the petition.
  3. Automatic Stay: Once filed, the U.S. courts will stop creditors from collection activities.
  4. Trustee Appointment: A court-appointed trustee reviews your assets and debts.
  5. Meeting of Creditors: Next, you must attend a meeting where creditors may ask questions.
  6. Debt Discharge or Repayment Plan: In Chapter 7, the U.S. courts eliminate the debts entirely. In Chapter 13, they create a repayment plan over 3–5 years.
  7. Financial Fresh Start: After successful completion of the program, you will be free from any other liability.

Pros and Cons of Filing Bankruptcy

Bankruptcy is attached to negative feelings and often disregarded in the financial world, but there are both pros and cons to this that you must know:

Pros:

  • Stops harassment from creditors.
  • May discharge unsecured debts such as credit cards and medical bills.
  • Prevents repossession in Chapter 13.
  • Provides a legal process to regain financial footing.
  • Allows retention of exempt property.

Cons:

  • Stays on credit report for 7–10 years, affecting creditworthiness.
  • Some debts, such as child support, alimony, and most student loans, cannot be discharged.
  • Could result in loss of some assets.
  • May impact future loan and credit terms.
  • Public record may affect job prospects or personal reputation.

Note: Experts recommend bankruptcy for individuals who have extremely high debt (often $15,000 or more) and when they have no viable alternatives to manage repayment.

Future of Bankruptcy in the U.S.

There is a rise in bankruptcy cases in the U.S., and it's going to stay for the coming years. Why? Here are some reasons supporting it:

  • Economic Slowdown: Uncertain economic changes are continuing to cause financial distress.
  • Rising Consumer Debt: Debt levels are still high and concerning.
  • Interest Rate Environment: High interest rates are turning debts into unmanageable burdens.
  • Supply Chain and Employment Instability: Ongoing disruptions and workforce shifts may also cause issues.

Analysts say that bankruptcy filings will rise in 2026 as well. The numbers may go up to 54,000–60,000 corporate and way more for individual filings.

Why Are More People Filing Bankruptcy?

Every year, more people are coming forward to file for bankruptcy. The number is expected to grow in the coming years. Why? Here are some of the common reasons:

  • Medical Expenses: Medical bills are one of the top causes for healthcare and emergency financial issues.
  • Job Loss and Income Reduction: People are facing job losses which results in difficulty with debt payment.
  • High Consumer Debt: Loans and credit card debts have high interest rates, making debtors unable to pay off.
  • Unexpected Emergencies: People may face unexpected situations such as natural disasters, theft, or personal emergencies.
  • Economic Uncertainty: Lastly, inflation is affecting all consumers and businesses. Thus, it creates financial stress for both.

Steps to File for Bankruptcy

Bankruptcy is a complex process and needs multiple steps. Read below:

  1. Financial Assessment: You need to prepare a detailed list of assets, debts, income, and expenses.
  2. Credit Counseling: All debtors must complete a credit counseling program. Make sure to choose an approved agency within 180 days of filing.
  3. Filing the Petition: File the petition. Take legal assistance, as it is a complex legal procedure.
  4. Automatic Stay: The U.S. Courts will order creditors to cease all collection efforts against you.
  5. Meeting of Creditors: You then need to attend a hearing. Please note that creditors may ask you questions during the hearing.
  6. Court Decision: The court may discharge eligible debts (Chapter 7), approve a repayment plan (Chapter 13), or approve reorganization (Chapter 11).

Alternatives to Bankruptcy

Bankruptcy offers a fresh start. But there are more options than bankruptcy, such as:

  • Negotiation with creditors for lower payments.
  • Debt management programs
  • Debt consolidation loans.
  • Debt settlement agreements.

But why choose these options first? Bankruptcy hits your credit score badly for years. However, these options don't offer guaranteed solutions.

Conclusion

Bankruptcy filings are rising in the U.S., and there are multiple reasons behind it. High inflation, high interest rates, and emergency costs like healthcare. All these are impacting people's lives every day. But bankruptcy offers a fresh start. How?

It settles debts and discharges some of them based on the conditions. This offers a legal path to financial recovery. But like everything, bankruptcy also has a cost; it impacts your credit score badly. Moreover, you may lose some of your assets as well.

In this guide, bankruptcy and its types in United States law have been discussed. Also, the eligibility criteria and detailed steps that will help you make the best decisions have been covered. Remember, unlike the common belief, bankruptcy is not negative; rather, it is a legal way to restart your financial journey.

Need Help Understanding Your Options?

Bankruptcy is a complex legal process. It's important to understand all your options before making a decision. Connect with certified credit counselors to learn more about bankruptcy and alternatives that may be available.