This article is part of Forbes Advisor’s series, “Exploring the Fragile Underbelly of a Strong Economy,” where we delve into the overlooked sectors of the economy that are struggling to keep pace.
Four years ago, when she was 28, Courtney Henderson filed for bankruptcy. As a single mom, she was juggling her new business and a full-time job as a bank teller.
In 2018, she took the leap and quit her job to focus all her energy on making her business a success.
“From 2018 to 2019, I regularly used my credit cards to fund my small business,” Henderson explains. “I was covering expenses like office space and employee salaries. One card reached $11,000, and another hit $15,000.”
The combination of these responsibilities and her mounting debt became overwhelming, leading Henderson to decide to file for bankruptcy.
Today, at 32, Henderson reflects on that challenging period as a turning point, emphasizing the importance of understanding financial management and credit use for small business owners. Her experience has shaped her approach to her credit repair business, where she now helps others navigate similar financial struggles.
“I had never been late on a bill and was trying to maintain a perfect payment history by making the minimum payments. But when I realized that all my credit cards were maxed out, I knew I was in trouble.”
Young Adults Hit Hard as Bankruptcy Filings Surge
Henderson isn’t alone. Bankruptcy filings among 18 to 29-year-olds have surged nearly 17% from Q1 to Q2 of 2024 and are up 13% compared to last year.
While the pandemic sparked a drop in filings due to relief measures, debt among young adults has since risen, reaching $1.12 trillion for 18- to 29-year-olds. Filings have jumped 50% since a 24-year low in early 2022.
There’s been a rise in both potential and actual bankruptcy filings since late 2022, and the trend has continued into 2023, says Justin Gillman, bankruptcy attorney at Gillman, Bruton & Capone, LLC in New Jersey.
“This trend aligns with several other factors, such as rising interest rates, which have driven up minimum payments on credit card debt, making it even harder for people to keep up with their financial obligations.”
Many consumers avoid filing for bankruptcy due to fears of long-term credit damage and the stigma of being labeled financially irresponsible, even when it could offer a much-needed fresh start.
“We attach debt to self-worth and how smart or capable someone is, which causes people to avoid seeking help until they’re overwhelmed,” says financial therapist Sarah Carr. “It is not a life sentence. It is temporary.”
The Hidden Shame of Filing for Bankruptcy
Henderson often found herself lying awake at night, consumed by anxiety over her mounting debts. The stress of her financial situation took a toll on her mental health, making her feel trapped and hopeless.
“I tried to follow the Dave Ramsey approach and pay everything off or even get a second job while working full-time, raising my daughter by myself and trying to get my business off the ground, but it just wasn’t working,” Henderson says.
These sleepless nights pushed her to finally consider bankruptcy, seeing it as a way to relieve the overwhelming burden and start fresh.
Gillman says that, in his experience, bankruptcy clients often find it very difficult to even place their first call for assistance.
“Like any financial pressure, debt causes a host of mental health issues. Shame and guilt also are common amongst our clients,” he says.
Gillman adds that much of the shame people feel when they can no longer afford their debt comes from believing there is “a moral obligation to repay the debt” and that something like bankruptcy proceedings will “judge” their merit as a person in seeking relief.
Why Bankruptcy Isn’t the Financial Death Sentence People Fear
Another problem, experts say, is that people aren’t educated about bankruptcy and its repercussions.
“We have seen so many clients pay thousands of dollars in debt relief programs only to find the cost of a Chapter 7 bankruptcy to be well less than this amount and a more effective way to a fresh start,” Gillman says.
Henderson’s experience echoed this belief.
“I first looked into debt relief programs, but you have to stop making payments, which would mean all of my efforts to make sure I was never late on payments disappear,” Henderson says. “You also have to pay fees, and there’s no guarantee that creditors will agree to negotiate or accept the terms offered. It’s a lot of risk for something that isn’t definite.”
Working in the financial services industry, Henderson gained a unique insight by seeing others’ credit histories firsthand. She saw that people who filed for bankruptcy could still secure low-interest loans and rebuild their credit faster than she expected.
“When I was working as a bank teller, I saw people with recent bankruptcies getting auto loans at 2% interest and mortgages at 5%,” Henderson says. “That put me on a path of researching how bankruptcy would actually affect my credit, and I realized what I believed for so many years was wrong.”
Like many people, Henderson viewed bankruptcy as shameful, but her perspective shifted when she noticed how wealthy individuals and businesses used bankruptcy as a strategic financial tool, free from moral judgment. This realization helped her see bankruptcy as a viable option for financial recovery rather than a personal failure.
Xue Connelly, a lawyer at Friedman, Grimes, Meinken & Leischner PLLC in Virginia, specializing in bankruptcy, says that bankruptcy carries more of a stigma among peers than with financial professionals, such as lenders and bankers or employers.
“Bankruptcy is increasingly seen as a legitimate legal recourse for financial difficulties,” Connelly says. “Lenders remain cautious about bankruptcy on the collections side, but they understand it better than most people. For lenders, bankruptcy doesn’t carry a stigma; they primarily focus on assessing risk.”
Going From a Poor Credit Score To a Good Score In Less Than a Year After Bankruptcy
While bankruptcy is often considered a credit score killer, that’s not entirely accurate. Many people’s credit is already struggling by the time they consider filing.
After filing, getting approved for credit might be challenging, and even if you do, expect higher interest rates and less favorable terms. But filing for bankruptcy can actually give your credit score a boost once your debts are wiped out, as long as you’ve got a solid plan to rebuild your credit strategically.
Henderson’s credit score plummeted from 720 before she filed to 580 shortly after her bankruptcy, but less than a year later, it had climbed to 692. This wasn’t just a stroke of luck; it resulted from a calculated, strategic plan. Henderson knew precisely how to turn her financial setback into a comeback:
- After her bankruptcy discharge, Henderson waited three months before applying for new credit.
- She always checked for preapproval before applying to eliminate hard inquiries that can negatively impact credit scores.
- She applied for a secured Discover card to rebuild her credit.
- She avoided subprime credit cards and targeted reputable companies like Chase and Discover. She used credit reviews, which typically happen after six months, to upgrade from secured to unsecured cards.
- She chose cards that automatically increased credit limits after six months, reaching limits like $4,500.
While the bankruptcy will stay on her credit for up to 10 years, Henderson is focusing on the comeback, not the drawbacks, as she sticks to her plan to rebuild her credit and avoid relying on credit cards to cover bills.
And even with bankruptcy on her record, she landed several new jobs in finance.
“I’ve been offered a few employment opportunities in finance even with the bankruptcy. Yes, I got denied for some jobs, too,” she admits.
When asked if she has any regrets about the process, Henderson’s response is that she wished she filed for bankruptcy sooner. “I was too worried about what people would say,” she says.
When Is Bankruptcy a Good Idea?
To see if bankruptcy is the right choice for you, start by talking with a financial advisor specializing in bankruptcies. Additionally, free or low-cost legal help is available. Organizations like Legal Aid and pro bono programs can connect you with volunteer lawyers. You can also use Free Legal Answers for brief online consultations.
Share your complete financial situation, including debts, assets and income, so that they can offer personalized advice. They’ll help you weigh bankruptcy against other options like debt consolidation or repayment plans.
To find a legitimate advisor, look for a Certified Financial Planner (CFP) or consult with a nonprofit credit counseling agency accredited by the National Foundation for Credit Counseling (NFCC). Always check credentials and reviews to ensure they’re reputable.
There are two main types of consumer bankruptcies: Chapter 7 and Chapter 13, and choosing the right one depends on your financial situation.
Chapter 7 Bankruptcy is for those with low income and few assets. It wipes out most unsecured debts quickly, stops collection calls and is done in a few months. However, you could lose assets such as a second home or vacation property, a vehicle worth more than the exemption limit or expensive jewelry. Chapter 7 bankruptcy remains on your credit reports for up to 10 years.
- How to qualify: To qualify for Chapter 7 bankruptcy, your income must pass a means test, which compares it to the median income in your state, and you must complete a credit counseling session. However, if you’ve had a Chapter 7 bankruptcy discharge in the past eight years or a Chapter 13 discharge in the last six years, you’ll need to wait until those time frames are up before you can file for Chapter 7 bankruptcy again..
Chapter 13 Bankruptcy suits those with regular income who want to keep valuable assets, such as a primary home or a vehicle. It involves a 3- to 5-year repayment plan, stops foreclosure and can reduce overall debt. It stays on your credit reports for up to seven years, and making monthly payments can be challenging.
- Chapter 13 bankruptcy requires you to have a regular income to follow a repayment plan over 3 to 5 years. Your total unsecured debts must be under $465,275, and secured debts must be under $1,395,875. You’ll also need to complete credit counseling and submit a repayment plan. If you’ve received a discharge from Chapter 13 in the past two years or Chapter 7 in the last four years, you won’t be eligible for a new Chapter 13 discharge until those time periods are up.
Chapter 7 Bankruptcy Pros and Cons
Pros:
- Quickly eliminates most unsecured debts
- Stops collection calls and wage garnishments
- Process completed in a few months
- No repayment plan is required
Cons:
- Potential loss of non-exempt assets
- Stays on credit report for 10 years
- May not cover all types of debt
- Limited eligibility based on income
Chapter 13 Bankruptcy Pros and Cons
Pros:
- Keeps valuable assets like home or car
- Debt repayment over 3 to 5 years
- Stops foreclosure and repossession
- Potential to reduce overall debt
Cons:
- Requires regular income for repayment
- Stays on credit report for 7 years
- Longer process than Chapter 7
- Monthly payments may be challenging
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