Typically, an economic crisis in the U.S. is accompanied by an increase in bankruptcy filings. During the Great Recession, the upward trend of bankruptcy filings tracked closely with the increase in unemployment. Based on historical trends, a new paper suggests, we should have seen an increase of about 200,000 consumer bankruptcy filings nationwide during the second quarter of 2020.
Instead, as the coronavirus pandemic has thrown the country into economic turmoil, unemployment has reached record highs, and many businesses have closed or entered Chapter 11 bankruptcy, consumer bankruptcy filings have declined. Year-over-year filings were consistent during the period from January through mid-March, when a national emergency was declared. Then, the trend changed abruptly: mid-March through April filings were down 39% compared with the same period in 2019. The largest decline has been in Chapter 13 filings.
That disconnect is puzzling at first, especially as we see reports of millions of people facing possible eviction and a significant percentage of U.S. households reporting that they don’t have enough food. Now, researchers from the University of Illinois at Urbana-Champaign, Brigham Young University and Harvard Business School have analyzed the trends and suggested five factors that have likely contributed to the decline.
Possible Factors Contributing to the Decline in Bankruptcy Filings
The pandemic and associated economic challenges are still unfolding, and our understanding will likely continue to evolve. At this point, researchers are suggesting the following factors have played a role in the decrease in bankruptcy cases:
Covid-19 Safety Protocols
The pandemic interrupted business as usual in a number of ways. For example, court operations were altered in many areas, some for several months. Many law firms changed the way they interacted with clients. And, where offices were open, vulnerable prospective bankruptcy filers may have been wary of venturing out to a law office or fearful of being required to appear for an in-person hearing. At Bond & Botes, we restructured to ensure that we could provide full bankruptcy law services to our clients remotely, but the response varied greatly from firm to firm and court to court.
Sudden, Widespread Loss of Income
In the spring, as many states ordered shutdowns of non-essential businesses, tens of millions of workers were displaced. The unprecedented influx of new applications, combined with efforts to implement the federal $600 weekly enhancement, complications with new types of benefits, and the challenges of keeping unemployment offices operating while observing safety protocols created significant delays in the processing of unemployment applications in many areas. That gap in income may have left many Americans temporarily too cash-poor to pay filing fees and bankruptcy attorneys. The researchers found some support for this idea in the fact that filings increased shortly after federal stimulus checks went out.
CARES Act Assistance
Once implementation smoothed out; the CARES Act did its job for many people. That is, finances were stabilized in the short-term, and many even had extra money to catch up past-due debt payments. The need for debt relief likely subsided for many–even among those who just weeks earlier had been too short of money to consider bankruptcy.
Uncertainty about the Future
Stimulus money, enhanced unemployment compensation and legal protections against eviction were temporary measures, but it wasn’t clear how long the pandemic would continue to impact the economy or when people could expect to return to stable and reliable income. It still isn’t. That uncertainty may have many people reluctant to make long-term decisions about how to manage financial problems. For instance, some may be concerned that filing bankruptcy too soon would be a mistake, since their situations may continue to worsen. Though Governor Ivey has said she won’t shut Alabama businesses down, safety concerns may keep customer numbers down, and some companies have closed their doors permanently. One recent report indicated that 68% of Alabama restaurant operators believed they would be out of business within six months without additional support. On the other hand, another round of stimulus payments or enhanced unemployment may provide a different solution.
Lack of Urgency
Often, people who have been struggling with debt for a long time decide to take action because some threat is on the horizon. It may be wage garnishment, or fear that an automobile is nearing repossession, or an impending eviction or mortgage foreclosure. A combination of temporary legal protections and programs implemented by creditors took many of those threats off the table in the short-term, meaning fewer people were faced with a need to act quickly.
Is a Wave of Bankruptcy Filings Still Coming?
We still don’t know how long social distancing and other precautions will be necessary, how many more businesses will close their doors forever, or whether the federal government will provide additional assistance to individuals and businesses.
However, with unemployment rates still significantly higher in most states than they were pre-pandemic, protections against evictions, foreclosures and some other types of collection activity expired or expiring, and many people running behind after months of unemployment or reduced income, the time to explore longer-term solutions is drawing near for many. If you’re one of the many who has been juggling and scraping throughout the pandemic and know it can’t continue, please know that we can help.
Now may, or may not, be the proper time for you to seek bankruptcy protection. You should only make this decision after consultation with an experienced bankruptcy attorney. But if bankruptcy is even a possibility in your future, I encourage you to reach out for advice now. Decisions you make today could affect the assets you will be able to protect, the fresh start you could obtain, and even if you will need to file at all.
Having practiced consumer bankruptcy law for over thirty years, I have learned that I often could have provided much better help to my clients if they had come to me earlier. It is hard to make good decisions while under the pressure of debt. So why not reach out for advice now? Calling a good bankruptcy attorney doesn’t mean that you will indeed be filing bankruptcy – it means that you want to know your options and to be prepared for what may come. Bankruptcy filings are down currently, but it is my opinion that this will change in the very near future. Take advantage of this downtime for our attorneys and learn what you can before things get busy.
At Bond & Botes, we’ve been helping people resolve debt for decades. We are currently offering absolutely free initial consultations by phone or video, so you can safely gather the information you need to make good decisions about your next steps. And you can do so from the safety of your own home or office. You can schedule yours right now by calling 877-581-3396 or filling out the contact form on this page.
Brad Botes is a principal of each of the Bond & Botes Law Offices throughout Alabama, Mississippi, and Tennessee. He holds a Bachelor of Science from the University of North Alabama, and a Juris Doctorate from Cumberland School of Law at Samford University. He and his team of bankruptcy lawyers have spent over 30 years guiding people through financial challenges. Read his full bio here.