Insolvency professionals expected a deluge of bankruptcy filings in the wake of the Covid-19 pandemic and the lock-downs that shuttered businesses throughout the country. Indeed, during the spring, many forecast that the bankruptcy floodgates would open in the summer.
There has been a number of high-profile Chapter 11 filings over the last six months, particularly in the retail sector, but the anticipated uptick in consumer bankruptcy filings has not yet occurred.
Statistics tracked by Epiq Systems Inc. indicate that consumer filings in 2020 are well behind the pace of prior years. From January through September, there were 394,618 non-commercial bankruptcies—behind the pace for 2019 (which, according to Epiq, ended with 718,584 non-commercial bankruptcy filings), and behind the three-year cumulative average of 721,430 non-commercial bankruptcy filings from 2017 to 2019.
Meanwhile, in contrast, 2020 commercial Chapter 11 filings through September totaled 5,529, already surpassing the 5,519 total in Chapter 11 filings for all of 2019 and nearing the annual average of 5,591 Chapter 11 filings from 2017 to 2019. Just since the beginning of the pandemic in March, commercial Chapter 11 filings are up 28.8% over the same period last year.
With many businesses still closed or operating at significantly reduced levels, and the number of weekly unemployment benefit claims still high, why hasn’t the flood of consumer bankruptcy filings yet occurred?
Factors That May Have Forestalled Bankruptcies
Part of the explanation lies in the nature of the pandemic itself. People may be delaying major undertakings due to a sense that they should reduce their activities and contacts. Some may have believed—and may still believe—that the pandemic would be ephemeral and that normalcy and improving fortunes would soon return, making bankruptcy unnecessary.
Surely too, government relief programs implemented in response to the pandemic played a large role. Notably, unemployment benefit payments were increased by $600 and the eligibility period extended by up to 13 weeks. The Paycheck Protection Program (PPP) gave small businesses access to forgivable loans to fund up to eight weeks of payroll.
Businesses and individuals are also taking advantage of low-interest loans and lenders have been prevented from foreclosing on properties. As a result, people have not been forced to turn to Chapter 13 bankruptcy to save their homes. These benefits temporarily buoyed individuals and helped stave off the need to file for bankruptcy notwithstanding the pandemic’s economic fallout.
Additionally, while job losses and pay cuts ordinarily create economic challenges, they do not immediately add to one’s debt load. With fewer stores and restaurants open and leisure activities largely canceled, there has been a general pullback on consumer spending.
News about the potential next wave of financial aid from Congress may also be prompting some to adopt a wait-and-see approach, hoping that such assistance will bridge the gap until there is a return to “normal.” Others may be waiting for the outcome of the looming election before deciding on next steps.
Countervailing Forces
But there are countervailing forces that may increasingly tilt individuals and small businesses to bankruptcy filing. The $600 federal boost to unemployment payments ended in late July, while the PPP closed in early August. Despite hope of another wave of aid from Washington, negotiations have repeatedly stalled.
With federal assistance drying up and the pandemic persisting—with no real timeline for a return to normalcy—the pressure on some consumers to consider bankruptcy may become more acute in coming months. In particular, it remains unclear when the retail, food, travel, and entertainment sectors will resume full operations.
Moreover, as more employees are working from home, there have been sharp declines in regional commuting and decreased demand for office space. These factors may lead to downsizing in certain areas, with the potential to remain at diminished levels for the foreseeable future.
Large Chapter 11 filings will also have an impact, as companies utilize the process to reshape operations or liquidate altogether, resulting in workforce reductions or elimination. A domino effect may well be underway, the full impact of which cannot yet be ascertained.
For historical reference, statistics maintained by the Administrative Office of the U.S. Courts reflect that during the first three full years of the Great Recession, 2009 through 2011, individual bankruptcy filings averaged more than 1.437 million per year. By comparison, there were a total of 1,420,555 individual bankruptcy filings during 2006 and 2007, the two years immediately preceding the beginning of the Great Recession in 2008. Consumer bankruptcy filings averaged 756,403 over the last three calendar years from 2017 to 2019, and have not exceeded 1 million filings in a year since 2013.
More Filings Seem Almost Certain
Certainly, troubled economic times appear to be a harbinger for sizable increases in individual bankruptcy filings. The dominoes may well fall this way. Although one never desires to declare bankruptcy, the silver lining in doing so is that it provides a trusted mechanism for shedding the burden of a multitude—although not all types—of debt and pursuing a financial “fresh start.”
As the economic effects of the pandemic persist and deepen, especially in industries that struggle to return to pre-pandemic levels, it is almost certain that many more consumers will turn to bankruptcy as the only mechanism to overcome Covid-19’s economic fallout.
Further, the social stigma normally associated with bankruptcy may dissipate if not altogether dissolve if people view the pandemic as the main or sole catalyst instead of a perceived lack of financial discipline, leading more consumers to seek bankruptcy relief.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
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Mark E. Hall is a partner in the Financial Restructuring & Bankruptcy Department at Fox Rothschild LLP. He centers his practice on complex Chapter 11 bankruptcy/reorganization cases and has extensive experience in restructuring, creditors’ rights, bankruptcy litigation and related commercial litigation. He is also a Subchapter V trustee for the District of New Jersey.
Michael R. Herz is counsel in the Financial Restructuring & Bankruptcy Department at Fox Rothschild LLP and focuses his practice on complex bankruptcy and insolvency matters, with a particular emphasis on representing creditors and Chapter 7 and Chapter 11 trustees in estate administration as well as creditors and committees.