Will there be more bankruptcies because of COVID-19?

As most of the country is experiencing the second round of coronavirus-related lockdowns, many Americans are wondering how COVID will affect the already stressed economy. While bankruptcy cases have slowed in recent months, most experts agree that the number of cases filed will rise significantly as we move into 2021.

Many Americans were able to make it through the first round of lockdowns in 2020 because of government stimulus checks, concessions from landlords, and forbearance from creditors. With no stimulus in the near term and lockdowns causing more businesses to drastically reduce hours or even shutter, it’s likely that many people will struggle.

Even with the downturn caused by COVID-19, there have been fewer bankruptcy cases in 2020 than in 2019 – there were 27% fewer cases in August 2020 compared to 2019. In all likelihood, the number of bankruptcy cases will likely skyrocket next year, possibly setting records.

Most bankruptcy experts fall into two schools of thought. One side predicted that 2021 would see a massive surge in bankruptcy cases, while the other side believes that there will be a gradual increase in cases over time.

According to Ike Shulman, co-founder of the National Associate of Consumer Bankruptcy Attorneys, “All of us in the field are expecting bankruptcies to spike up dramatically, probably later this year and even more so into the new year as the longer-lasting effects of the pandemic hit people in the wallet.”

Many Americans who never imagined that they’d need to talk to a bankruptcy lawyer are considering the possibility of filing bankruptcy. While bankruptcy usually stems from uncontrolled debt or unexpected medical expenses, many financially responsible people have lost their jobs due to pandemic-related restrictions.

The CARES Act that was enacted in late March mandated that mortgage lenders allowed homeowners with federally backed mortgages to stop making payments for six months, with a possible extension of 6 months. Between October and February, many homeowners will have to resume mortgage payments, and in some cases, banks might require that all missed payments are paid as well.

Many companies have been affected by the coronavirus as well. The list of brands that have filed for bankruptcy or completely shut down continues to grow: Dean & Deluca, True Religion Apparel, J. Crew, Neiman Marcus, JC Penney, Pier 1 Imports, Hertz, 24 Hour Fitness, California Pizza Kitchen, Ruby Tuesday, and many others.

The experts who follow the other school of thought believe that it’s more likely that we’ll see a more gradual increase in bankruptcy cases. Robert Lawless, a professor at the University of Illinois College of Law and bankruptcy researcher says, “People need to be more modest about their predictions. I think it’s pretty likely that bankruptcies are going to go up. I don’t think it’s an absolute certainty.”

According to Lawless, his research shows that bankruptcy is tied to debt levels, not unemployment rates. In other words, if people don’t have debt, they don’t file for bankruptcy.

Research from the Federal Reserve Bank of New York shows that while unemployment has spiked to levels not seen since the Great Depression, average household debt levels have fallen. The sharp decline in spending due to COVID-related lockdowns and social distancing has resulted in less debt.

It’s likely that Chapter 13 filings – typically filed by people with stable incomes and the ability to eventually pay back creditors – will probably decrease as Chapter 7 cases (where borrowers don’t have to repay creditors) increase.

In 2005, a new federal bankruptcy law went into effect, and since it was seen as less favorable to borrowers, many Americans rushed to file their cases before the effective date. This led to a huge boom in cases – almost 2.1 million cases were filed. When the housing bubble collapsed in 2007, and again in 2010 when foreclosures skyrocketed, bankruptcy cases boomed again.

While no one knows for sure what will happen in 2021, most experts and attorneys agree – we’ll see an increase in bankruptcy filings.

If you’ve been affected by the pandemic and are struggling with bills and debt, call us any time at 214-760-7777 for a free consultation. We’ll walk you through your financial picture and explain all of your options, so you can make the right decision for the future.