More Americans are going bankrupt. What does that mean?

Rebecca Lessley felt embarrassed when she filed for bankruptcy this month. Then she saw how many of her friends had already done it.

Lessley's troubles began three years ago, when she lost her job the same month she bought her Oklahoma City house. By the time she got a new job in social work, she had a pile of debt that was growing beyond what she could control.

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She recently made a Facebook post asking her friends for bankruptcy lawyer recommendations. Within an hour, four or five people messaged her with recommendations.

"And I had people also asking me, 'Hey, when you go through and you talk to them, will you please let me know how it goes? Because I'm considering the same thing,'" Lessley recalled.

Bankruptcy is a legal last resort for debt relief — and more Americans are using it than they were just a few years ago. While the word "bankruptcy" often conjures up images of failed companies, personal bankruptcies are significantly more common. More than half a million personal bankruptcies were filed last year, a nearly 50% jump from three years earlier, according to the Administrative Office of the U.S. Courts.

Filings at the end of March were up almost 12% from a year earlier.

Experts say this shows that a growing number of Americans have reached the point where the pressure of their debt has overcome the stigma of bankruptcy.

"It's telling us that consumers are having a harder time coping with their financial obligations," said Sasha Indarte, a professor of finance at the University of Pennsylvania's Wharton School.

Bankruptcy can be a financial lifeline

The first step in filing for bankruptcy is proving to a court that you can't pay your debts. Then, you get a court-appointed trustee to figure out the next steps. That could include a repayment plan, possibly selling off some assets and maybe getting some debt erased.

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Bankruptcy can also make handling your debt significantly less stressful by formalizing how it gets handled through the court, rather than having to fend off debt collection agencies.

"Possibly the biggest benefit of petitioning the court for bankruptcy is that all your creditors then have to stop harassing you," said Mary Eschelbach Hansen, a bankruptcy economist with American University.

A common bankruptcy concern is that it can hurt your credit history — and it does show up on your record. But if you're filing for bankruptcy, your credit score is probably already in rough shape.

In fact, your credit score could ultimately improve. Samuel Antill, an assistant professor at the Harvard Business School, said his research shows most people's credit scores recover within a year of filing and usually improve from there.

"People don't understand how good of a deal bankruptcy is," Antill said.

The bankruptcy rate is still below pre-pandemic levels, but rising

Despite the steady rise in the personal bankruptcy rate since 2023, filings are still below the pre-pandemic norm.

"Bankruptcies plummeted" during the pandemic years, said Bob Lawless, a professor of law at the University of Illinois and co-principal investigator for the Consumer Bankruptcy Project. "It was like turning a switch."

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By 2022, the personal bankruptcy rate had fallen about 51% compared to 2019, according to the Administrative Office of the U.S. Courts. That was likely because while COVID-19 and lockdowns caused an economic downturn, the government rolled out interventions meant to help people make ends meet. (Think of stimulus checks and expanded unemployment benefits.)

Today, that expanded social safety net is gone. Bankruptcy filings are climbing back up.

"They were artificially low and getting back to where they usually are historically," Lawless said.

Bankruptcy rate offers a glimpse at financial edge

Researchers caution against using the bankruptcy rate as an indicator of the country's economic well-being, particularly compared to broader figures, like the monthly jobs numbers from the Bureau of Labor Statistics.

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That's because bankruptcy represents an extreme. Just as the number of billionaires living in the United States doesn't tell you how the overall economy is doing, neither does looking at just families at the financial edge.

"I never interpret fluctuations in the bankruptcy rate as a terrible thing, as my first interpretation," Hansen said.

And bankruptcy numbers are, in some ways, an underestimate of financial distress, because stigma prevents many people who could benefit from the process from filing.

Still, the bankruptcy rate can give a sense of how many families are at the financial edge — and have likely been there for some time, considering how long it often takes people to decide to pursue the process.

"This is basically the end of a long, difficult journey, as opposed to something that just came out of the blue and happened to you overnight," said Matt Schulz, chief consumer finance analyst at Lending Tree, which recently did an analysis on the uptick in bankruptcy filings.

Rebecca Lessley is still working out the details of her bankruptcy, which will likely include a five-year repayment plan. But knowing how many of her friends also went through bankruptcy, she no longer feels ashamed. And she feels like she's on the right path.

"I, in a way, feel a sense of relief," Lessley said. "Maybe this is what I needed to get me back into a better position and to have a little bit more financial success."