The 2026 Bankruptcy Surge and the New Importance of the Co‑Debtor Stay

The recent report from LendingTree confirms that personal bankruptcy filings have surged 47% nationwide since 2022, reaching 549,577 filings in 2025. However, these figures only tell part of the story. As I have analyzed previously, this rise in filings is not limited to a few cities or states, as there has been an increase in bankruptcy filings in 49 states.

While the Southern states like Alabama, Georgia, Mississippi, and Tennessee, known as the “bankruptcy belt”  have led the country in per-capita filings, the financial pressures have now spread to the rest of the country.

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

Key Takeaways

• The National Surge: Personal bankruptcy filings have climbed 47% since 2022, a trend now impacting 49 states and moving well beyond the historically high-filing regions of the “bankruptcy belt.”
• Drivers of Debt: Household debt has reached a record high of $18.8 trillion, with student loans reaching $1.66 trillion, pushing households toward a breaking point.
• The Zero Equity Trap: With 84-month auto financing becoming the norm, car owners are perpetually “underwater.” If the vehicle is surrendered, there still remains the deficiency balance, leaving debtors and their co-signers legally liable for the difference between the loan balance and the auction sale price.
• Chapter 7 vs. Chapter 13 Risks: While Chapter 7 can discharge deficiency debt, reaffirming a vehicle loan keeps the original contract intact. If financial circumstances worsen after reaffirmation, the 8-year waiting period for a subsequent Chapter 7 discharge leaves debtors vulnerable to wage garnishment and liens.
• Co-Debtor Protection: Chapter 7 offers only temporary relief for co-signers, whereas the Chapter 13 Co-Debtor Stay provides protection for 3–5 years, giving co-signers the necessary time to restructure their finances.

The “Why” Behind the Rise in Bankruptcy Filings

The surge in bankruptcy filings is not attributed to one singular issue, but several. Household debt has reached its highest total, per the Federal Reserve, at $18.8 trillion, and $1.25 trillion for credit card debt.

Student loan debt is $1.66 trillion, with 12 million borrowers either in delinquency status or in default. However, as I analyzed previously, with the Treasury Department taking over as “debt collectors” on student loans, their aggressive tactics, which allow them to bypass normal court procedures, will only squeeze households further.

Add persistent inflation, elevated borrowing costs, and long-term financing on vehicles, and the financial picture becomes clearer.

The Zero Equity Auto Loan Trap

The “zero equity auto loan trap” has become the norm. With one out of every four car loans at 84-month financing, car owners are being followed by years of zero equity. In years past, a vehicle was often viewed as a tangible asset that might offer some cushion in a financial crisis.

But with car owners owing more on the auto loan than the car is worth, any financial emergency, whether a job loss or reduced income, increases their chance of repossession. My experience has been that this is a point of confusion for debtors.

It’s common for car owners to believe that because they surrendered the vehicle, it wipes out the balance. However, as I explain it to my clients, a car loan is a contract, and if the full amount of the contract isn’t paid, lenders can sue on the “deficiency balance,” which is the difference between the car loan balance and the sale price at the auction.

Filing for Bankruptcy With a Car Loan with Zero Equity

If you file under Chapter 7, you may surrender the vehicle and discharge any resulting deficiency balance. Given today’s high monthly payments, which on average exceed $700, and the prevalence of negative equity, this is frequently the most practical path for debtors seeking a true fresh start.

If you choose to retain the vehicle, the lender will typically require a reaffirmation agreement under §524(c). A reaffirmation does not modify the underlying contract: the monthly payment, interest rate, and remaining loan balance all remain exactly as originally agreed.

There’s also the added financial risk that if your financial situation changes and you can no longer afford to keep the vehicle, bankruptcy cannot be filed for another 8 years, giving the auto lender all that time to garnish your wages or place liens on your assets.

If your financial circumstances worsen after reaffirming and you can no longer afford the vehicle, you face an added risk. Under §727(a)(8), you cannot obtain another Chapter 7 discharge for eight years after your last filing. During that entire period, the auto lender retains full collection rights, including wage garnishment and liens, leaving you exposed with no bankruptcy protection.

Co-Debtors and Chapter 7 Bankruptcy

If a debtor files for bankruptcy, the automatic stay under §362 stops most collection actions, even against a co-debtor. However, Chapter 7 bankruptcies take between 2 and 3 months to finalize, so the protection of the automatic stay for co-signers is limited.

If the vehicle is surrendered, the creditor retains the right to pursue the co-debtor for the deficiency. This forces the co-debtor to either reach a payment arrangement with the lender or file for bankruptcy.

The Protection of Chapter 13 Bankruptcy for Co-Debtors

For the 2026 debtor, Chapter 13 is no longer just a repayment plan, but a strategic option to protect co-signers under §1301.

Unlike Chapter 7, which lasts a few months, with Chapter 13, the co-debtor is generally protected under the automatic stay for the duration of the plan, which lasts 3-5 years. Since the vehicle was surrendered, the debt is considered unsecured and is listed on Schedule E/F as a deficiency balance. As an unsecured debt, the lender will receive some payments, but usually not enough to wipe out the deficiency balance. But with the added time frame of the automatic stay under §1301, the co-signer has time to prepare themselves financially.

Closing Thoughts for Debtors and Co-Debtors

As bankruptcy filings continue to rise, debtors and co-debtors must be prepared for a household budget crisis since the “margin for error” continues to shrink. As we battle inflation and higher borrowing costs, debtors need to be aware that surrendering an asset doesn’t eliminate the debt. Co-debtors also have to be prepared for the reality that the bankruptcy of a debtor does not eliminate their obligations either.

Educational Resources

• For Institutions: Colleges and universities can purchase or request examination copies of my textbook directly from Routledge Publishing.
• For Students & Practitioners: Single print and digital copies are available via Amazon Books.
• Video Lectures: Stream comprehensive legal breakdowns and video explanations on the Prof. Hernandez YouTube Channel.

Bankruptcy Court & Consumer Resources

Explore a deep dive for consumer guides and court directories to navigate your legal options:

• A step-by-step master guide on Filing for Bankruptcy and Navigating the Petition.
• Access full directories for the Federal Bankruptcy Court System and Trustee Contact Information.
• Protect your assets by reviewing your specific State Bankruptcy Exemptions or compare them against the Federal Bankruptcy Exemptions.
• Prepare for your court date with the updated brief on the 341 Meeting of Creditors Rules and Procedures.

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

Statutory Reference to the Bankruptcy Code

• 11 U.S. Code §524 – Effect of discharge.
• 11 U.S. Code §727 – Discharge.
• 11 U.S. Code §362 – Automatic stay.
• 11 U.S. Code §1301 – Stay of action against codebtor.