The Indicator from Planet Money - Is bankruptcy really all that bad?

Episode Date: August 20, 2026

Bankruptcy has a negative stigma surrounding it. But what if we told you it’s not as bad as you may think? In fact, economists think we should actually see more of it! Based on the radio story: More Americans are going bankrupt. What does that mean?Fact checking by Sierra Juarez.Your Next Listen — We're in a renter's market (believe it or not)Connect with The Indicator — Sign up for The Indicator’s weekly newsletter! — Buy the Planet Money book — Find our socials, YouTube and more! — For sponsor-free episodes, subscribe to NPR+ Support public media with NPR+ and enjoy perks for over 25 podcasts like this one. This show’s perks include sponsor-free listening. Learn more at plus.npr.org. See pcm.adswizz.com for information about our collection and use of personal data for sponsorship and to manage your podcast sponsorship preferences.NPR Privacy Policy

NPR. Everything 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 are Us, Blockbuster, Bed Bath and 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. Everything just kept getting to that point where I was like, I can't save anything anymore. I'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 Adrienne 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. 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. This 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. Like I was really panicking and kind of freaking out a little bit. That's what led to. 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-Hansson 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 and 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. What 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. No, look, if you need a 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. That 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 used. 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 because I'm considering the same thing? Personal bankruptcy filings have been climbing. Last year, they were up nearly 11% 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 are. ask you about Bob Lawless professor of law. It'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 sharpfall 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 that, 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. Things 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. And 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. And 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. It's also worth remembering bankruptcy is supposed to be a relief. It's the solution to the problem. It's if, you know,

the financial distress is disease, 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. And, 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 is produced by Corey Bridges and engineered by Cina LaFredo. It was fact-checked by Sierra Juarez, Kagan Cannon is our editor and the Indicators of Production of NPR.