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Consumer bankruptcies at historic lows amid pandemic recession

Millions of Americans are unemployed, and thousands of businesses are struggling amid a crushing recession brought about by the COVID-19 pandemic. Yet bankruptcy filings remain at historic lows.

The number of filings may be deceptive, according to a California bankruptcy attorney, who said many of her clients simply can’t afford to pay the cost of filing.

Total filings are on track to be the lowest since 1987, according to officials with the American Bankruptcy Institute. 

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Bankruptcy filings are so low, in fact, that professionals who help consumers seek protection from bankruptcy courts are struggling to get by because business is drying up, said ABI Executive Director and General Counsel Amy Quackenboss.

Consumer bankruptcies are the lowest since 1986, with an estimated 525,000 expected this year, down from 752,160 last year. 

Expected bankruptcy tsunami didn’t appear

With so many people out of work, on the surface at least, it doesn’t make sense that consumer bankruptcies have decreased so much. 

In June, Quackenboss said professionals were bracing for a tsunami of filings that had been held at bay by a number of stimulus measures and other assistance, such as a moratorium on evictions and foreclosures.

But the tsunami never appeared, even as some assistance measures expired. 

California bankruptcy attorney Jenny Doling said that’s because people are struggling so much, they can’t afford to file.

Bankruptcy clients on payment plans

A member of the board for the National Association of Bankruptcy Attorneys, Doling said all her clients are on payment plans, paying down the cost of filing, which differs depending on circumstances. She said the average cost for a simple Chapter 7 filing is about $1,800.

Doling said her clients are paying $100 or $200 a month toward their fees. In the time leading up to filing, Doling said, her office helps clients by talking to creditors. 

Usually, Doling said, she has about 15 clients coming in a month who are paid in full and another 15 on payment plans. Now, all are on payment plans.

Jenny Doling

Doling said her business is struggling because it isn’t getting the income it used to get, and at the same time, it’s serving clients. In fact, she’s seen a 28% increase in paying clients in the past 10 months. 

“We’re very, very busy, but there’s no money to pay us,” she said. “It definitely has affected us, because if you think about it, we have that many more cases open and it’s taken that much work from my staff, and the income is trickling in. … It’s brutal.”

At the same time, she said, “I don’t think my business is at risk by any means. We’ve just taken a hit on the monthly cash flow. I’ve done this enough. This is my third recession.”

Doling said she can’t file her clients’ cases with the courts until they pay for her services in full upfront because once the cases are filed, the court discharges that debt. That would mean she was working for free. 

“We have a business to run,” she said. “We have to get paid on our side.”

California homestead law changing Jan. 1

Another factor keeping filings down, Doling said, is that many Californians are also holding off on filing bankruptcy until Jan. 1 because that’s when a new law will go into effect allowing more realistic homestead exemptions. Under the old law, a single person could exempt just $75,000 in property. The highest exemption was $175,000 for people over 65 or disabled.

That was “grossly inadequate” in a state with very high real estate values, Dolan said. Under the new law, that will go up to a minimum of $300,000 and as high as $600,000.

Quackenboss said the new stimulus bill could continue to stave off bankruptcies. But at some point, she said, professionals expect an increase.

“People are racking up debt holding their breath,” Quackenboss said, “hoping they’re going to get their job back … or the virus is going to go away.” 

She said she’s “totally speculating,” but thinks many people are “holding on with the thought this will be back to normal very soon.”

Bankruptcy said to help with debts

Doling said people may not understand how filing bankruptcy can help them. It puts a temporary stop on eviction and foreclosure. “It halts everything” and creates an orderly way to deal with creditors, she said.

“One of the main things we see when they’re filing for bankruptcy is they’re throwing every penny at their credit cards trying to stay afloat.” With bankruptcy, they can eliminate debt and can go back into putting a portion of their paychecks into an emergency fund. Bankruptcy, she said, allows people to rebuild their credit faster than debt settlement or trying to slowly pay off debts over years.

“Most debts are dischargeable,” Doling said. “There are very few debts that aren’t.” 

Even some tax debts can be wiped out through bankruptcy. 

“For the most part, (people who file bankruptcy are) just good hard-working people and they just need a fresh start,” Doling said.

She said the elderly are the fastest growing demographic filing for bankruptcy. This trend predates the pandemic. In fact, a 2018 study found more than a two-fold increase in the rate at which Americans aged 65 and older file for bankruptcy and an almost five-fold increase in the percentage of older persons in the U.S. bankruptcy system.

The Indiana Legal Studies researchers found, “older Americans report they are struggling with increased financial risks, namely inadequate income and unmanageable costs of healthcare, as they try to deal with reductions to their social safety net. As a result of these increased financial burdens, the median senior bankruptcy filer enters bankruptcy with negative wealth of $17,390 as compared to more than $250,000 for their non-bankrupt peers. For an increasing number of older Americans, their golden years are fraught with economic risks, the result of which is often bankruptcy.”

Commercial bankruptcies increase
The pandemic has caused one category of bankruptcies to spike – Chapter 11 business filings, which have been running more than 40% higher than the same time last year. Overall, Quackenboss expects about 8,500 of the business filings, compared to about 6,800 in 2019.

In November, commercial Chapter 11 filings increased 46% over November 2019, according to the American Bankruptcy Institute. 

Differences in states

There were geographic differences in bankruptcy filings around the country. The average per capita bankruptcy filing rate was 1.74 per 1,000 people for the first 11 months of 2020. Five states had the highest per capita filing rates in that period:

  1. Alabama with 3.91 filings per 1,000 people.
  2. Delaware with 3.74 per 1,000.
  3. Tennessee with 3.46.
  4. Nevada at 2.95.
  5. Mississippi at 2.93 per 1,000

Contact Elaine Silvestrini at Elaine@legalexaminer.com. Follow her on Twitter at @WriterElaineS.