Professor’s Warning: 15% Bankruptcy Surge Fueled by Student Loans & AI Job Risk

The latest statistics confirm the bankruptcy surge I’ve been warning about: the financial storm is intensifying and has now reached crisis levels. Individual Chapter 7 filings are up an astonishing 15% year-to-date, signaling that more American households are being pushed past the point of no return.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

In baseball, three strikes and you’re out, a fact the World Series-winning Los Angeles Dodgers proved yet again. But for the American consumer, the economy has delivered a Financial Triple Threat, and these three ‘strikes’ are pushing households past the point of no return and into a bankruptcy filing.

Professor’s Warning: Student Loans, Debt, & the Job Market Fueling a 15% Bankruptcy Surge

The latest bankruptcy statistics confirm the financial storm continues to intensify like a hurricane off the coast of Florida. Individual Chapter 7 filings are up 15% year-to-date, with total filings showing an increase in October 2025 compared to the previous year.

I’ve been predicting this since early this year, and bankruptcy filings have risen steadily each month for corporations and individuals. This “Financial Triple Threat” is likely to continue hitting American households.

Strike One: Student Loan Debt Payments Erase Cash Flow

The bankruptcy surge in Chapter 7 filings (up 15% year-to-date) is directly linked to the continuation of federal student loan payments as COVID-era protections expired. Borrowers who hadn’t made a student loan payment in years are now facing a massive, non-dischargeable monthly bill. This creates a severe cash flow crisis.

• The Bankruptcy Surge: Borrowers are not filing Chapter 7 to discharge their student loans, a near-impossible task since Congress never defined “undue hardship” under the Bankruptcy Code, leading to inconsistent rulings in each district on the dischargeability of student loans. However, debtors are using bankruptcy to discharge all other unsecured debt (credit cards, medical bills) in order to free up every possible dollar to cover that single, massive student loan payment.
• Consequences: Analysts are seeing a large increase in the number of borrowers whose loans went from current to delinquent due to the end of the “on-ramp” period. This rising tide of delinquency suggests the financial pain is far from over, quite the opposite, it’s only beginning, and it’s putting immense pressure on household budgets.

Strike Two: Record Debt and Sky-High APRs

Many American families are struggling financially, and even a small unexpected cost could push them into debt.

• The Result: Total U.S. Household Debt soared to a new record of $18.59 trillion in the third quarter this year. Leading this increase are credit card balances, which hit a record high of $1.23 trillion per the Federal Reserve.
• Credit Card Debt: This record debt is compounded by high interest rates. Credit card annual percentage rates (APRs) for accounts accruing interest are now above 22%. Families are not buying luxury goods; they are using high-interest revolving credit simply to keep pace with inflation and rising costs.
• Consequence: This is a key reason Chapter 7 filings are on the rise. When households are forced to rely on record-high credit card balances at 22% interest just to afford everyday essentials like gas and groceries, they’re operating on the edge. A single unexpected expense, like a medical bill, car repair, or a smaller paycheck, can push them past the tipping point, leaving bankruptcy as the only option.

Strike Three: A Shrinking Job Safety Net

While the debt crisis is accelerating, so is job insecurity, which only increases the odds of having to file for bankruptcy. Worries over the government shutdown surged in the early part of November, pushing consumer sentiment into its lowest point in more than three years and just off its worst level ever, according to a University of Michigan survey. This collapse in confidence translates directly into less spending and a heightened fear of job loss.

• The Holidays Are Here: U.S. retailers are forecasting a significant pullback in hiring for the 2025 holiday season. The National Retail Federation expects retailers to hire between 265,000 and 365,000 seasonal workers, a sharp drop from the 442,000 seasonal hires in 2024. This is the smallest seasonal hiring projection since the recession-hit season of 2009.
• The Financial Impact: For many lower and middle-income families, seasonal work is the only way to generate the extra cash needed to pay down holiday debt or to have funds for gift giving. But the less money earned, the less money is circulating throughout the economy. It’s why I keep comparing the economy to my bird pond.
• Consequence: Less seasonal income leads to an increase in credit card use. That’s one reason bankruptcy filings, especially Chapter 7, are climbing: families are running out of options to manage high-interest debt.

Conclusion: The Professor’s Take

The 15% surge in bankruptcy filings isn’t just a national trend; it’s a ripple effect hitting communities everywhere, which translates into a real, local strain for everyone.

Student loans, record-high debt, and a shrinking job market create a perfect financial storm. The rapid adoption of Artificial Intelligence (AI) by businesses is also impacting hiring decisions and job stability today.

Your focus should shift to preparing for the worst-case scenario of a loss of income or increased expenses.

Bankruptcy: The Strategic Act of Preparedness

For the financially savvy individual, bankruptcy is not a failure; it is the ultimate act of strategic preparation.

Drop the Debt That’s Dragging You Down: If you’re stuck paying high-interest credit card bills and can’t save for emergencies or retirement, especially with today’s shaky economy, it’s time to rethink your strategy. Filing for Chapter 7 bankruptcy could be the smartest way to clear that debt and free up money to prepare for whatever comes next.

Perfect Your Plan Now: While bankruptcy might be part of your strategy, sometimes it’s a long-term strategy, meaning to protect your financial interests and assets, bankruptcy needs to be delayed. The best way to prepare is to consult with a bankruptcy attorney to prepare your debt strategy.

To protect your finances in uncertain times, focus on what you can control. If debt relief is needed, filing for bankruptcy can be a smart move to reset your finances and start building the savings you’ll need to handle future challenges, especially with AI disrupting the economy and financial challenges ahead.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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