Why Record Debt $18.59T Guarantees a Bankruptcy Surge in 2026

The headlines focus on the record high of household debt, but as a bankruptcy attorney and professor, I look beyond the total figure to analyze the crucial debt-to-bankruptcy lag. This lag explains why the current surge in monthly filings is not a surprise, but a predictable outcome, where bankruptcy filings will continue to rise.

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

Beyond the Headlines: Reading the Fed’s Report

Every quarter, the New York Federal Reserve issues its report on U.S. household debt. The headlines are scary since there was $18.59 trillion in the third quarter of 2025. Simultaneously, consumer bankruptcy filings are rising consistently (businesses too), up over 15% year-over-year.

The mainstream media focuses on the total debt, but my experience in bankruptcy law leads me to an unavoidable conclusion: bankruptcy filings, while rising, lag behind the reality of the situation.

The question isn’t if the bankruptcy dam will break, but how quickly it will crack. There are three stages to consider in this process.

Stage I: The Pressure of Rising Debt and the Affordability Crisis as Household Budgets Increase

The $18.59 trillion figure tells us that households are under extreme financial pressure. High interest rates on mortgages, car loans, and especially credit card interest rates, combined with an increase in persistent non-discretionary spending like food and energy, are destroying the ability of many to keep up.

Legal Insight: The Means Test Factor and Ties to the Bankruptcy Surge

In the bankruptcy world, this translates to an increase in Chapter 7 filings. The Means Test, which determines if a debtor makes too much money to qualify for Chapter 7 bankruptcy, takes into consideration reasonable and necessary living expenses.

As inflation and interest rates rise, so does the actual cost of supporting a family, resulting in more debtors qualifying for Chapter 7 relief.

Professor’s Note: The income figures for the Means Test are updated twice annually. For the latest figures on the average income in your state, please review this blog post.

Stage II: The Lag Between Delinquency and Strategically Maxing Out Credit Cards

This is the most critical stage, and it reveals why the bankruptcy surge will likely continue well into 2026 and most likely 2027. This is where debt shifts from being burdensome to unpayable.

The key data point is the massive jump in serious delinquency (90+ days late) across all sectors, including the 7.05% increase in serious credit card delinquency.

The Professor’s Take: The Debtor’s Final Move

The increase in delinquency represents millions of consumers who are already past the point of budgeting and are unable to make at least the minimum payment. At this stage, debtors know the end is near. They realize they can no longer meet their obligations, and bankruptcy is their only solution.

Knowing they will file for Chapter 7 bankruptcy soon, many debtors will make the strategic decision to max out their remaining credit card limits to pay for essential living expenses or pending emergency needs. If used for non-essential items or luxuries, that could result in the bankruptcy trustee objecting. I discuss this issue in a prior post regarding a shopping spree on Black Friday and then filing for bankruptcy.

This pre-petition spending has two effects:

1. It inflates the current delinquency figures and overall debt total, and
2. It extends the lag, as the debtor uses that final bit of credit to survive for a few extra months before pulling the trigger and filing their petition. This includes the necessary time period, typically a few months, that a debtor needs to pay the balance of attorney’s fees and costs.

Stage III: The Final Step, Filing for Bankruptcy

The rise of bankruptcy filings each month is simply the predictable consequence of the mounting delinquency data from months earlier and the strategic spending that followed.

Once debt is seriously late, the creditor stops trying to collect and starts preparing to sue. This likewise results in a lag between the rising debt amount due to interest and late fees and the filing of the bankruptcy petition. The moment a debtor is served with a debt collection lawsuit, the clock starts ticking.

The debtor is forced to choose between:

• Filing Chapter 7: To discharge the credit card and medical debt before a court judgment allows wage garnishment or asset seizure.
• Filing Chapter 13: To restructure debt into a manageable repayment plan in order to save an asset like a car or a house that is facing repossession or foreclosure.

The Professor’s Conclusion

The Fed’s report confirms that we are past the point of financial planning for millions of households. The delinquency data show they have been pushed to the edge, and the rising bankruptcy numbers are not going away anytime soon.