At the height of the financial crisis, there were nearly 1.6 million bankruptcy filings, the majority of which were consumer cases. Nearly 10 years later, the annual total has dropped to less than 800,000. But that change isn’t a reflection of economic health alone. Filing for bankruptcy can be an expensive undertaking—lawyers usually charge upwards of $1,000 to file a Chapter 7 case—and student loans are difficult to discharge through bankruptcy.
And yet for many Americans, filing for bankruptcy is not only a viable option but one that often proves financially beneficial and gives them a clean slate. We spoke to three people about why they chose to file for bankruptcy and the impact it had on their finances. None of them had regrets about their decision to file.
“For most people, it’s just a clean slate.”
“There’s so much stigma surrounding bankruptcy,” says Whitney Reynolds, who filed for bankruptcy five years ago because of ballooning credit card debt. “But let me tell you, it’s the best thing I ever did for myself. It’s the most important decision I made as an adult.” For Reynolds, it seemed like the only way out of what felt like an impossible situation. Since college, they had racked up $23,000 dollars of credit card debt.
“The thing about credit cards is that they’re great,” Reynolds says. “You can buy so many things, and it seems like you never have to pay for them. Then my mother passed away,” Reynolds says. “I did get a life insurance element, and we sold her house. So I had money to clear out this first wave of debt.” But after spending the life insurance money, Reynolds again accumulated more than $20,000 of debt.
It was Reynolds’s father who recommended bankruptcy; he also helped cover the filing cost. “You hear ‘bankruptcy,’ and you think of Donald Trump,” Reynolds says. “There’s a lack of knowledge of what it means to somebody who’s making an average income and has run into some trouble and made some mistakes. For most people, it’s just a clean slate.” They have been free of debt since and now have a credit score in the 700s.
For young people who find themselves mired in credit card debt, Reynolds sees bankruptcy as a chance for a fresh start, assuming you don’t own a home or other assets. Going to bankruptcy court and taking the requisite personal finance courses before and after bankruptcy can also put things in perspective. “That was kind of humbling—listening to these people tell stories of failed businesses and medical problems,” Reynolds says. “And then here I am, just an idiot who overused a credit card.”
The experience forced Reynolds to start budgeting properly and make credit cards a tad less accessible. “I do have one credit card now that currently does not have a balance on it,” Reynolds says. “But I literally keep it in a Ziploc bag full of water in the freezer, so I can’t get to it just because I maybe want to order something online. It’s there for an actual emergency, when I might not have cash available.”
If your debt is something you wake up thinking about, says Reynolds, it’s a sign you should take action. “That’s one thing that’s just been amazing since I filed,” Reynolds says. “I don’t have any debt, so I don’t think about it. I may not have a lot of money, but at least I don’t owe money.”
“I’m living without trying to incur more debt.”
Bankruptcy can be a byproduct of extenuating circumstances—most often exorbitant medical bills, which reportedly account for two-thirds of bankruptcies. For Robert Gale, going through a divorce was the catalyst. “My ex-wife and I had quite a bit of consumer debt,” Gale says. “We were managing it fine and making payments; we’d never been late on a payment and make decent money. Then I decided to file for divorce, and during that process, my ex-wife looked at finances and decided that—she made less money than I did—she wouldn’t be able to pay for her half of the debt if we split everything 50/50 in the divorce.”
Gale felt backed into a corner. He worried his credit would take a hit if he filed for bankruptcy. But the couple had amassed $140,000 of debt that he could be on the hook for if he didn’t file. “Since all of the debt was jointly accrued, if she filed for bankruptcy, then all of those creditors were going to come after me,” Gale says. “I was then going to be responsible for 100% of the debt as opposed to just 50%. And with my income and where I was at, I wouldn’t have been able to afford [that]. So with all of that information, I thought it was in my best interest to just go ahead and file jointly with her.”
While married, Gale and his ex-wife had a plan to pay off their debts long-term. But going through bankruptcy made Gale much more cautious about taking on further debt. “Circumstances do change,” he says. “So it definitely opened my eyes a little bit and changed my viewpoint on a lot of different things.” Now remarried, Gale says the only debt they’re carrying is their mortgage.
One misconception about bankruptcy, Gale says, is that you lose all your assets. “I thought we were going to lose the house, the cars—that they would take anything that’s got any value to it,” he says. “That’s not exactly true for Chapter 7. If you can show that you’re able to pay specific debts, you can reaffirm debts that are larger and continue to pay those.” But Gale acknowledges that the process is complicated and that it’s worth getting a lawyer if you can afford to do so. “I know some people will file and try to do everything themselves,” Gale says. “I decided to opt to hire a lawyer to take care of everything for me, and I would highly recommend that.”
Though he didn’t want to file for bankruptcy, Gale concedes it was to his benefit in the long run. And the credit score he was so worried about doesn’t seem nearly as important as it once did. “I’m not too focused on my score anymore,” he says. “I’m living without trying to incur more debt.”
“It really was the last resort.”
Like Gale, Mopelola Gloria Fagbemi also filed for bankruptcy in the context of a divorce. After her marriage ended, Fagbemi had to keep her finances afloat while supporting three children. “I kept thinking that I could handle it with the child support, and with my income and due diligence of paying down my debt and working with all my creditors,” she says. “But one day I got a garnishment from payroll. I looked at the bottom line and realized I won’t survive.” That meant creditors would start deducting money directly from her paycheck to pay off the debts she owed—an income reduction she knew she couldn’t afford.
For many people considering bankruptcy, a major hurdle is the cost of filing. The average lawyer can cost well over $1,000—money that someone like Fagbemi simply couldn’t give up when she first researched bankruptcy, years earlier. But when she finally did file, she did so because she knew it was her best option, even if it meant setting aside money for a lawyer. “It really was the last resort,” she says.
Fagbemi cautions against getting too swayed by the people in your life who might offer unsolicited advice, especially at the prospect of bankruptcy. “I’m part Nigerian, part American, and you’re not supposed to give up,” Fagbemi says. “People will tell you that you can push through and make the payment. They’ll say don’t file for bankruptcy, but they’re giving that advice based on what they believe. You need to think about what’s good for you and how you can sustain it—and then make your decision only based on that.”
Correction: In a previous version of this article, Reynolds’s pronouns were unintentionally changed.