Record 401(k) Hardship Withdrawals are a Leading Economic Indicator for 2026

There is a recurring theme I’ve discussed in my business and bankruptcy law classes and on this blog: bankruptcy is rarely the first step. It is the last step, the final domino in a long, painful sequence of financial survival maneuvers.

A recent report from Fox Business (March 2026) shows where the economy is heading. According to the data, a record 6% of Americans tapped their 401(k) plans for hardship withdrawals in 2025. To put that in perspective, that is nearly triple the pre-pandemic average of roughly 2%.

As a bankruptcy attorney, I see this statistic not merely as a “retirement” issue but as a desperate final measure. When people start raiding their future to pay for their present, the “bankruptcy lag” is about to expire.

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

Key Takeaways on the Fox News Report and 401(k) Hardship Withdrawals

• A record 6% of Americans took 401(k) hardship withdrawals in 2025, nearly triple the pre‑pandemic average, an early warning sign of deeper financial distress.
• Hardship withdrawals are a last‑resort move, typically made only after cutting expenses, selling assets, refinancing, or attempting credit counseling.
• Foreclosure pressure is intensifying, with 11 consecutive months of year‑over‑year increases heading into 2026.
• Medical debt remains the leading cause of bankruptcy, and the expiration of ACA tax credits under the “One Big Beautiful Bill” is increasing financial strain for families.
• Once a 401(k) is depleted, financial options narrow dramatically, making bankruptcy far more likely.
• Consumers should avoid tapping protected retirement funds without legal advice, since these accounts are often shielded in bankruptcy.

The Last Resort: Anatomy of a 401(k) Withdrawal

The Fox report highlights that the top reasons for these withdrawals were avoiding foreclosure or eviction (36%) and covering medical expenses (31%). Foreclosures have risen consistently each month, and medical bills are the number one reason why debtors file for bankruptcy. In 2025, we experienced a surge in bankruptcy filings for large and small businesses, individuals, and farmers.

The Results and Consequences: Foreclosures, Medical Debt, and the “Big Beautiful Bill”

The Fox Business report highlights a desperate survival strategy to avoid foreclosure or eviction. These aren’t just numbers; they are leading indicators of the current state of the economy.

The 11-Month Foreclosure Streak: We are no longer speculating about a housing correction. As of early 2026, foreclosure filings have risen year-over-year for 11 consecutive months.

Medical Debt: Medical bills remain the leading cause of bankruptcy in the United States, and with the enactment of the “One Big Beautiful Bill” (OBBBA), affordability of healthcare premiums is front and center as the Affordable Care Act (ACA) (aka Obama Care) credits have expired.

The 2026 Financial Forecast: The Bankruptcy “Lag” is Expiring

In my view, the “Big Beautiful Bill” will likely accelerate the bankruptcy rate for middle-class families. Last year, we saw a rise in bankruptcy filings, with a rise in hardship withdrawals and foreclosures. With bankruptcy the last step, there’s always a lag in filing between when the economic hardship begins and when bankruptcy is filed.

The rise in hardship withdrawals usually comes after a person has already cut household expenses as much as possible. In many cases, this even includes selling or surrendering assets like a car.

That temporary relief is often followed by attempts to refinance debt with a personal loan or by enrolling in a credit‑counseling program to negotiate lower payments. When those options aren’t enough, people frequently turn to their 401(k) or IRA as a last resort.

In my experience working with thousands of bankruptcy clients, these withdrawals are typically used to pay down debt, eliminate high-interest balances, or cover the cost of hiring a bankruptcy attorney.

The Professor’s Conclusion

If 6% of the workforce hit the “hardship” button in 2025, history tells us that a wave of bankruptcy filings is imminent, especially with an increase across all chapters in bankruptcy from large and small businesses filing Chapter 11, individuals filing Chapter 7, and farmers filing Chapter 12. We are seeing the “Bankruptcy Lag” in real-time. Once the 401(k) is depleted, there are no more moves left on the financial chessboard.

If you find yourself looking at your 401(k) balance as a way to “catch up” on credit cards or medical bills, stop! Consult first with a bankruptcy attorney before you spend the only asset that is already protected by law.

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