Household financial insecurity long preceded the second inauguration of Donald J. Trump; indeed, it probably helped Trump win the election. But each and every day, the Trump administration takes actions that compound uncertainty for families, businesses, non-profits, and local governments. Taken to its logical conclusion, Trump’s second presidency is on track to make Americans bankrupt again.
The American bankruptcy system nearly burst at the seams in response to the Global Financial Crisis. In the coming years, how much filing for bankruptcy will help or hurt people, as debtors and as creditors, will depend on who they are. My book Unjust Debts explores how the bankruptcy system not only falls short on its central objectives but actively contributes to inequality in America.
American bankruptcy law is more trusting and less scrutinizing of fake people, particularly large ones, relative to real people.
Unjust Debts also develops a connection between the system’s regressivity and its breadth and flexibility, which infringes on individual liberty and the ability of states to make and enforce laws on core policy matters far removed from financial distress.
The Costs of Chaos
Markets and people are right to be rattled over the litany of executive orders and acts: erratic tariff pronouncements, firing large numbers of public sector employees with neither notice nor valid cause, breaching obligations to fund non-profit organizations, scientific experiments, education, identity theft risks posed by DOGE access to data security, and much more.
Even if the Trump administration complies with court orders halting illegal or unconstitutional activities, much financial damage already will have been done – to families, businesses, non-profits, and local governments.
Congress has done little to curb executive branch overreach and is poised to make the lives of lower-income families even more precarious. For example, the so-called Big Beautiful Bill passed by the U.S. House of Representatives would slash access to health care and food for millions of financially struggling households.
America not only leaves individuals to bear big risks well beyond their control, but makes borrowing money to make ends meet the de facto safety net, further destabilizing families and small businesses when times get even tougher.
What Bankruptcy Does and Does Not Do
Bankruptcy law does not print money. Bankruptcy does not train people for new jobs. The law’s key features include a near-universal pause on debt collection and, ultimately, the ability to cancel or modify legal responsibility for some debts. That’s a blunt, but extraordinary, form of relief. Article I section 8 of the United States Constitution authorizes the U.S. Congress to write uniform laws of bankruptcy, although few could have imagined the system’s eventual size and scope.
Bankruptcy’s core functions can be illuminated through an unlikely source: Squid Game, a South Korean Netflix series global sensation, with billions of hours watched and subtitles in over thirty-five languages. In Squid Game, financially distressed individuals competed in high-stakes childhood games. The winner’s debts get satisfied. Losers die.
The American bankruptcy system is supposed to provide a fresh start to debtors without death, violence or games of any kind, and should do so in ways that are predictable and fair to creditors. But on these objectives, the system falls short.
Bankruptcy for Real People
For all the quips about Trump’s familiarity with bankruptcy, his companies’ chapter 11 filings (with relatively unimpressive results) shed little light on the system’s most essential function. The vast majority of cases involve individuals in serious financial distress, with modest and often fluctuating incomes and limited assets.
Typically, these families have done anything and everything to manage their difficulties without bankruptcy court. Well before Trump’s second term, approximately one in ten living American residents had resorted to bankruptcy at least once. Filing rates fluctuate (in some relation to consumer debt) but through it all bankruptcy remains the busiest national-level court in America.
The early chapters of Unjust Debts discuss how the bankruptcy system has become intolerably costly and complicated for individuals, particularly after an ill-advised but overwhelmingly bipartisan overhaul in 2005. The impact is not merely hypothetical. Among other harms, economists have tied those changes to increased mortgage defaults and home foreclosures leading into the Global Financial Crisis.
Bankruptcy is unaffordable for many who most need it. In 1973 the U.S. Supreme Court held by a 5-4 vote that the Constitution does not establish a right to bankruptcy access. In other words, to use this social insurance system, people must pay significant fees exactly when they are in the most distress.
Black Bankruptcy, White Bankruptcy
Due to access fees and other factors, Black individuals who file for bankruptcy pay more to get into the system and get less debt relief than white individuals. The law is written without reference to race, but its features are optimized to help white individuals more substantially than Black individuals.
Bankruptcy is more complicated than it should be, but fixing it is not rocket science.
One important study, which documented how lawyers’ advice varied on whether a hypothetical couple was white or Black, made the front page of The New York Times. The story, published in 2012, quoted a lawyer saying the system needed to be changed. The research documenting the problems continues. The drumbeat for change has not, with some notable exceptions.
Of course, outside of bankruptcy, America has huge and deeply embedded racial wealth, income, and credit gaps. Sociologist Louise Seamster, author of Black Debt, White Debt, notes that “Debt’s role in your life depends on who you are,” noting Trump’s 2016 self-attribution as “King of Debt.” The disparities in bankruptcy reflect inequality in background conditions, and then deepen the unfairness.
Fake People
Big enterprises are a tiny fraction of all bankruptcy filers, but their household name recognition (Rite Aid, Friendly’s, Boy Scouts of America, Spirit Airlines) commands widespread attention. Many types of American law treat businesses as people, and bankruptcy law does too. The standard legalese refers to corporations and the like as “artificial persons.” I use the less syllabic “fake people.”
American bankruptcy law is more trusting and less scrutinizing of fake people, particularly large ones, relative to real people. Although the bankruptcy system covers both individuals and entities, if lawyers for each type of case did a Freaky Friday swap, they would find themselves in unfamiliar territory. In other words, while bankruptcy has fallen short in providing basic debt relief for struggling individuals and families, the system offers remarkable privileges for enterprises to change the legal rights of counterparties without honoring all of their commitments.
Big companies can cancel more debts than real people—even debts related to wrongdoing, such as long-term cover-ups of child sex abuse, sexual harassment, or hazardous products. Businesses also can cancel legal obligations much earlier in the bankruptcy process than real people. Big companies in chapter 11 bankruptcy are rarely subject to trustee oversight, and are given considerable deference over their expenses and affairs.
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Humans almost always have their affairs overseen by trustees, who, along with some courts, make often-granular value judgments about expenses, which may themselves have a racial or gender component (what do you eat? What streaming services do your kids watch? Can’t you fix your own hair?).
Businesses are also allowed more flexibility in unbundling the checks and balances written into Chapter 11, particularly through quick sales of companies (currently underway by direct-to-consumer genetics testing company 23andMe), allowing extraction of the benefits for some creditors and stakeholders to the detriment of others.
Big enterprises even can decide where to go bankrupt, seeking out judges and courts more likely to rule in their favor; companies have filed Chapter 11 in Texas with no connections to the state beyond a few thousand dollars in a local bank account and a post office box. Meanwhile, individuals in bankruptcy payment plans must accept the whole package deal to have any chance of debt relief, and must file where they live.
Bankruptcy as a Legal Swiss Army Knife
As stated by the Reverend William J. Barber II, head of the Poor People’s Campaign, on The Daily Show: big corporations, not low-income people, are the leading government entitlement seekers. He wasn’t talking about bankruptcy but the comment resonates here as well. Some companies without traditional debt or financial problems file for bankruptcy to cap liability for alleged wrongdoing while circumventing the civil justice system and juries.
As traced in chapter 6 of Unjust Debts, Bankruptcy’s unusual career in tort liability management started with asbestos and has expanded to the opioid crisis, life-threatening birth control devices, cancerous asbestos, environmental hazards, and even coverups of child sex abuse and mistreatment of incarcerated people in private prisons.
Taxing the scope of the Constitution’s bankruptcy power, these cases are particularly in tension with the important principle of federalism, as in common practice these cases shift policy decisions and procedures sharply away from states.
Bankrupt Cities
Since the 1930s, cities and other municipalities have had some access to the American bankruptcy system, but the scope of municipal bankruptcy has expanded dramatically since the 1970s.
As chapter 4 of Unjust Debts discusses, even allegations of violations of constitutional rights, including those involving unjustified bodily harm by government actors, are considered ordinary debts—no different from broken contracts for borrowed money.
When cities with histories of police brutality file for bankruptcy, police officers have a prominent seat at the negotiating table while injured residents typically do not. These bankruptcies strip injured people of their legal rights, who instead are promised nominal financial compensation that may or may not materialize.
Can This System Meet This Moment?
Even without a rogue U.S. presidency, bankruptcies were destined to rise this year. But a more substantial Trump bump in filings will compound the problems Unjust Debts identifies.
Bankruptcy is more complicated than it should be, but fixing it is not rocket science. Given the more fundamental threats to democracy and the rule of law the United States is facing, a broader reimagining of bankruptcy will not be on the table anytime soon. But reform is rarely all or nothing.
Some small improvements could be made easily, given the level of Congressional control Trump seems to wield. In his first term, Trump signed a bipartisan bill that increased the feasibility and efficiency of small business reorganization. That law has become less useful because an important, but temporary, component expired last year.
Trump and his Congressional partners should fix that. Given that his other policies are creating financial hardships for small business owners, it is literally the least he could do.
