Is bankruptcy really all that bad?

**Mary Eschelbach Hanson** (0:01)
NPR.

**Darian Woods** (0:06)
Everything you know about bankruptcy is wrong.

**Adrian Ma** (0:09)
Which is a bold claim, but may not be far from the truth. I mean, when a lot of people hear the word bankruptcy, there's a good chance that the image that pops into their mind first is a business. Toys R Us, Blockbuster, Bed Bath and Beyond.

**Darian Woods** (0:23)
But the truth is the overwhelming majority of bankruptcies are personal bankruptcies.

**Adrian Ma** (0:29)
Yeah, if you are talking bankruptcies, you are most likely talking about people. Regular people like Rebecca Leslie.

**Rebecca Leslie** (0:35)
My utility bills are going up, the groceries are going up, gas is going up. Everything just kept getting to that point where it was like, I can't save anything anymore, I'm out of savings.

**Darian Woods** (0:47)
So earlier this year, Rebecca filed for bankruptcy.

**Rebecca Leslie** (0:51)
At first, you know, I was kind of embarrassed, you know, in a way, like, I feel like I was failing.

**Adrian Ma** (0:56)
And this embarrassment Rebecca felt about bankruptcy, it's common, but bankruptcy economists and lawyers will tell you, it's not game over.

**Darian Woods** (1:04)
It's also not a label, like, say, being broke. Instead, bankruptcy is a legal option, one that people choose, and it's a choice those researchers say more people should be making.

**Adrian Ma** (1:18)
This is The Indicator from Planet Money, I'm Adrian Ma.

**Darian Woods** (1:21)
And I'm Stephen Massaha. On today's show, we dispel myths about this maligned indicator, and learn what bankruptcy can tell us about the economy we all live in.

**Adrian Ma** (1:36)
Bankruptcy is usually a last resort, meaning that people who file for it have been under the weight of debt for a long time.

**Darian Woods** (1:43)
Yeah, that's true for Rebecca Leslie. Three years ago, Rebecca was living in her sister's home, just outside Oklahoma City, and her sister offered to sell her the house.

**Rebecca Leslie** (1:53)
This is a house that I've put a lot of work into, redoing the original hardwood floors, all of that. I was so excited.

**Adrian Ma** (2:00)
Rebecca would only have to cover $55,000, just what's left on the mortgage. Seemed like a great deal, but then...

**Rebecca Leslie** (2:08)
I lost my job the same month that I bought my house.

**Darian Woods** (2:12)
So with a new mortgage and no income, Rebecca started applying to hundreds of jobs.

**Rebecca Leslie** (2:18)
Literally hundreds of jobs. And I couldn't even get interviews, or I could barely get rejection emails.

**Adrian Ma** (2:25)
She eventually found a job, but six months without income caused her debt to grow bigger than she could control.

**Rebecca Leslie** (2:31)
I was looking at, like, losing my house. Like, I was really panicking and kind of freaking out a little bit.

**Darian Woods** (2:39)
That's what led Rebecca to consider bankruptcy.

**Adrian Ma** (2:41)
Bankruptcy, at the end of the day, is a legal path towards debt relief. And more immediately, it can be a path towards stress relief.

**Darian Woods** (2:49)
That is what Mary Eschelbach Hanson says. She is a bankruptcy economist with American University.

**Mary Eschelbach Hanson** (2:55)
Possibly the biggest benefit? All your creditors then have to stop harassing you.

**Darian Woods** (3:01)
Mary says just filing for bankruptcy stops creditors' attempts at collecting from you.

**Mary Eschelbach Hanson** (3:06)
And also they're harassing phone calls, right? And then gives you some time to figure out what legally is going to happen, for the court to figure out what legally is going to happen to your debt.

**Darian Woods** (3:20)
What can happen could be a repayment plan, possibly selling off some assets, maybe even getting some debt wiped away.

**Adrian Ma** (3:27)
Now, one drawback to bankruptcy is that it can hurt your credit history.

**Darian Woods** (3:31)
No, look, if you need to file for bankruptcy, your credit score is probably already in pretty rough shape.

**Adrian Ma** (3:36)
Fair.

**Mary Eschelbach Hanson** (3:37)
There's not much of a long-run negative consequence of using the bankruptcy law. After a few years, you can get new credit again.

**Darian Woods** (3:46)
In other words, your credit score could actually be better post-bankruptcy.

**Adrian Ma** (3:50)
But there is a more immediate challenge. You'll likely need to hire a lawyer. Filing for bankruptcy is complicated, and you also need to prove to the court that you can't pay off your debt.
That can be really difficult without a bankruptcy lawyer's expertise.

**Darian Woods** (4:02)
Yeah, the cruel irony here is that people often have to save up for a lawyer to go bankrupt.

**Adrian Ma** (4:08)
Rebecca Leslie made a Facebook post asking her friends to help find a lawyer, and she was surprised by how many people related.