Starbucks Layoffs, Local Coffee Bankruptcies: A Professor’s Take on the Bankruptcy Crisis

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

Key Points and Takeaways

• Record Household Debt: Total U.S. household debt has surged to a record $18.59 trillion (as of Q3 2025), representing a $642 billion increase year-over-year. This massive debt burden is the financial backdrop driving the bankruptcy surge.
• The Tariff Effect: Tariffs imposed on coffee imports are acting as an unconstitutional tax, raising costs for essential goods without creating a single domestic job, thereby pushing small coffee shops into Chapter 11 reorganization or closure.
• The Bankruptcy Surge: The combination of debt, rising rates, and job market instability has resulted in a 15% year-over-year increase in consumer bankruptcy filings (Chapter 7 and Chapter 13).

The Coffee Crisis: Tariffs, Layoffs, and the Supreme Court

Starbucks always dominates the coffee headlines, especially with its massive $1 billion restructuring plan, which includes the closure of hundreds of stores and the layoff of hundreds of non-retail employees. Approximately 2,000 employees will be laid off this year. Simultaneously, small, independent coffee shops are quietly closing their doors or filing for Chapter 11 to reorganize and keep the doors open.

This simultaneous collapse of the small, independent coffee shop sector is not merely due to competition; it is a direct result of the same tariff pressures I predicted earlier this year.

The U.S. almost entirely relies on coffee imports, and the imposition of tariffs by the Trump Administration, bypassing Congress, which has the authority to tax, I consider it an unconstitutional tax on American businesses. Ultimately, that tax is passed on to the consumer.

The constitutionality of these very tariffs is so serious that the Supreme Court heard oral arguments on the matter this week. This is why I posted a video earlier in the year that the balance of global trade and the economy is dependent on the Supreme Court.

The policy simply makes no sense: the core purpose of a tariff is to protect domestic industries under an “America First” strategy. Yet, the United States does not produce coffee commercially; therefore, these tariff taxes on imports serve no protective purpose and fail to create a single American job. Instead, the tariff punishes American small business owners and consumers.

We are now seeing the fallout from this trade policy, evidenced by bipartisan efforts to correct it, such as the introduction of the “No Coffee Tax Act“ by Senators Rand Paul and Catherine Cortez Masto.

Record Household Debt Fuels Bankruptcy Surge

Because of my background in bankruptcy law, I see the trend of the bankruptcy surge as symptoms of a deeper problem: a cost-of-living and debt crisis that is pushing both the laid-off employee and the struggling small business owner toward personal financial collapse. This assessment is confirmed by official data.

Just this week, the Federal Reserve Bank of New York released its latest report showing that total U.S. household debt has surged to a record $18.59 trillion as of the third quarter of 2025. This staggering total is $642 billion higher than the same period last year, representing a 3.58% increase when compared to last year.

The consequence of this record debt is the predictable surge in consumer bankruptcy filings. As I detailed in a recent piece, the total number of Chapter 7 and Chapter 13 filings has increased by 15% and has risen steadily each month. A combination caused by student loan debt, rising interest rates, and a weakening job market. You can read my full analysis of this surge here: 15% Bankruptcy Surge: Student Loan Debt & Job Market Warning.

The Employee’s Tipping Point: From Layoff to Chapter 7 Bankruptcy

The first and most direct path to bankruptcy is the job loss that follows corporate restructuring. When Starbucks announces layoffs, it triggers an immediate question for those employees: How do I pay my debt without an income?

For a significant number of these individuals, the answer is Chapter 7 Bankruptcy.

Passing the Means Test

Eligibility for Chapter 7 hinges on the Means Test, which looks at your average income over the last six months. When a white-collar worker with a high debt load (mortgage, two car payments, credit cards) loses a six-figure salary, their income plummets.

1. Lost Income: The loss of steady pay immediately pulls their average income down, often qualifying them for Chapter 7.
2. Unsecured Debt Crisis: Without income, they can no longer maintain high-interest, unsecured debts like credit cards and medical bills. Chapter 7 allows for the rapid discharge (wipe out) of these debts, providing a necessary fresh start.

The Business Owner’s Trap: The Personal Guarantee

The second path to bankruptcy involves the small business owner. When a local coffee shop or small franchise files Chapter 11, the owner must deal with the company’s financial failure, which almost always bleeds into their personal finances. This is due to the Personal Guarantee.

The Personal Guarantee Explainer

Creditors, whether from equipment lessors to commercial landlords, rarely lend to a brand-new, unproven small business without requiring the owner to sign a Personal Guarantee.

• This contract legally states that if the business (the LLC or Corporation) cannot pay its debt, the owner (the individual) is personally responsible.
• The business’s legal protection (like an LLC) vanishes the moment the owner signs this document.

For this same reason, business owners tend to believe they are protected because their corporation is categorized as a limited liability company (LLC). I discuss this issue in detail in this prior blog post.

When the small business decides to skip Chapter 11 bankruptcy and simply liquidate its assets, creditors immediately turn to the owner to pursue the personal guarantee. This is often the primary debt that forces the owner into their own personal bankruptcy.

The Chapter 13 Solution for Owners

While a former employee usually opts for Chapter 7, a small business owner often must file Chapter 13 if they have substantial assets they need to keep (like a home) or if they have non-dischargeable business tax debts. Chapter 13 allows them to organize a repayment plan to deal with the debt stemming from that personal guarantee over three to five years.

The Professor’s Take

The financial stress reported in the news, whether it’s large-scale layoffs or the retail squeeze, is forcing families to make tough financial decisions, including potentially filing Chapter 7 and Chapter 13 bankruptcy. Understanding the link between job loss, which may create the opportunity for Chapter 7 eligibility, and the personal guarantee (which traps the small business owner) is the first step toward effective debt relief.

If you are facing the anxiety of a layoff or the collapse of your business, do not wait. The sooner you decide on your next step, the quicker you proceed to your financial future. This is especially true for the federal government furloughed employees.

As I outlined in a previous blog post, a furlough serves as a textbook example of how a temporary loss of income can immediately make a debtor eligible for Chapter 7 under the Means Test. Delaying your filing could, paradoxically, make you ineligible later on if the furlough ends and your income returns.

Furthermore, consider the changes announced earlier this month, where the income figures used in the Means Test have been increased due to inflation. These higher thresholds mean that more people will now qualify for Chapter 7 debt discharge than before. To further learn about the increased income allowed in your state, read this blog post.

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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