The 2026 Consumer Bankruptcy Surge: Navigating the Financial Reset

Following 2025, which many dubbed a “correction year,” the beginning of the first quarter of 2026 is likely to see a definitive surge in consumer bankruptcy filings. According to the latest data from the Administrative Office of the U.S. Courts, there were 549,577 Chapter 7 and 13 cases filed, an increase of non-business filings by 11.2% when compared to the previous year (494,201).

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

Key Takeaways on the Consumer Bankruptcy Surge

• Bankruptcy Filings Are Accelerating: There were almost 550,000 consumer bankruptcy cases filed in the last 12 months, with 2026 on pace to exceed that number as layoffs and cost-of-living pressures continue to increase.
• Corporate Bankruptcy Filings and Household Pain: The 76% spike in business bankruptcies and January’s 108,435 layoffs signal structural shifts tied to automation, tariffs, and cost-cutting rather than a temporary slowdown.
• Credit Card Debt Reaches Record Levels: Per the Federal Reserve, credit card balances exceeded $1.2 trillion as household budgets try to keep up with the cost of goods.
• Student Loan Repayment Formulas Are Mathematically Misaligned with Reality: IDR and RAP calculate payments on Adjusted Gross Income (AGI), not actual expenses, pushing borrowers to drop health insurance or default, both of which increase bankruptcy risk.
• Chapter 7 Bankruptcy Versus Chapter 13: Chapter 7 bankruptcy offers a fast reset for unsecured debt, while Chapter 13 is increasingly used to protect homes and cars where the equity isn’t protected, or the debtor fell behind on payments.
• The Automatic Stay Protects Against Lawsuits: The automatic stay halts lawsuits, garnishments, repossessions, and even shields co-borrowers during the full duration of a Chapter 13 plan.

Preparing for the 2026 Economic Squeeze

The business bankruptcy surge, which saw a 76% spike in January 2026, is the result of several factors, including companies in a desperate scramble for AI integration and the fallout from global tariff instability.

The result? January 2026 recorded 108,435 layoffs, the highest volume for that month since the height of the financial crisis in 2009. In 2009, the layoffs were in reaction to the Great Recession. This is a preemptive strike by corporations not only as they shift aggressively toward automation, but also as they face increased costs for goods.

The bankruptcy surge is not surprising considering these facts, and it’s a prediction I made early last year. These factors are behind the half a million plus consumer bankruptcy filings we are seeing today, and will likely increase in 2026.

Below is the total of Bankruptcy filings categorized by Chapters for the years ending December 31, 2021-2025, published by the Administrative Office of U.S. Courts.

Year	Chapter 7	Chapter 13	Chapter 11	Chapter 12
2025	356,724	207,889	9,201	315
2024	310,631	197,244	8,884	216
2023	261,277	183,956	7,456	139
2022	225,455	157,087	4,918	169
2021	288,327	120,002	4,836	276

Economic Factors to Consider

While there is a business and consumer bankruptcy surge, several factors need to be considered that will continue to affect the 2026 financial landscape:

The Persistence of Inflation: The cumulative cost of living remains significantly higher than in 2022. This has forced households to use “Buy Now, Pay Later” (BNPL) services for essentials like groceries, a shocking financial trend now surfacing that is a major economic warning sign flashing red.

Credit Card Debt at a Tipping Point: Total U.S. credit card debt surpassed $1.2 trillion in late 2025, and household debt has hit record highs. With interest rates remaining elevated, the “interest-only” trap has become inescapable for many middle-class bankruptcy filers.

The Student Loan Crisis: Income-Driven vs. Expense Formula

The resumption of federal student loan payments has officially exhausted the emergency savings of younger professionals, but the trigger for filing isn’t just the debt; it’s the calculation.

The IDR Flaw: Income-Driven Repayment (IDR) plans and the new 2026 Repayment Assistance Plan (RAP) calculate payments based strictly on Adjusted Gross Income (AGI). They operate on a theoretical “disposable income” that ignores the real-world expenses such as housing, childcare, and health insurance costs in 2026.

So the fact that health insurance costs have increased would have no bearing on the monthly student loan payments. The result?

People are dropping their health insurance coverage. What are the top reasons for filing for bankruptcy? Medical bills and health-related issues! So borrowers face the issue of continuing to pay skyrocketing health insurance premiums and default with creditors, resulting in a lawsuit that could garnish their wages, freeze bank accounts, or a lien on their home, or drop their policy.

If they get sick or have an emergency situation, they end up filing for bankruptcy!

Strategic Financial Pivots: Understanding Your 2026 Options

In the current economic climate, choosing between Chapter 7 and Chapter 13 is a strategic decision, not just a matter of eligibility.

Chapter 7: The Liquidation Reset

Chapter 7 remains the most common path for those seeking a total “Fresh Start.”

The Chapter 7 Means Test: Updated Census data for the Means Test means that eligibility thresholds have changed.

Best For: Individuals with overwhelming medical bills or credit card debt and few non-exempt assets. It is the fastest route, often providing a discharge in 90 to 120 days.

Professor’s Note: The Means Test is based on the average of the last six months of income compared to the state’s median income. Those figures are adjusted twice a year. You can find the latest figures for your state here.

Chapter 13: The Asset Preservation Tool

We are seeing a notable uptick in Chapter 13 filings as a way for debtors to protect their non-exempt assets.

The 2026 Reality: With homeowners’ insurance and property taxes spiking, Chapter 13 is being used more frequently to “cure” mortgage arrears and stop car repossessions.

Best For: Those with a stable income who want to keep their home or car while reorganizing debt into a 3-to-5-year repayment plan.

Here’s a summary of Chapter 7 bankruptcy versus Chapter 13.

Bankruptcy	Chapter 7	Chapter 13
Duration	3-4 Months	3 to 5 Years
Asset Risk	Non-exempt assets sold	All assets are typically retained
Primary Benefit	Total discharge of unsecured debt	Ability to catch up on arrears (missed payments)
Requirement	Must pass the Means Test	Must have a regular income

Professor’s Note: Regardless of which chapter in bankruptcy is filed, the automatic stay prevents lawsuits from moving forward so long as the case remains pending, even in Chapter 13, which lasts up to 5 years. During this time period, even co-borrowers are protected by the automatic stay.

The Professor’s Take

The numbers tell a clear story: the economy is under fierce pressure, and households are stretched past their limits. With layoffs at their highest January level since 2009 and more than half a million consumer bankruptcy cases already filed, 2026 is not a year to “wait and see.” It’s a year to understand your position in the financial landscape and make informed, timely decisions.

Bankruptcy is no longer a last-minute reaction to a crisis. It can be your tool for protecting assets and long-term financial stability: a fresh start. Whether the right path is Chapter 7 or Chapter 13 depends on your income, expenses, and your assets.

The most important takeaway is simple: know your options before you need them. The households that fare best in 2026 will be the ones that recognize the warning signs early, understand the protections available to them, and take proactive steps rather than reactive ones.

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 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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Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.