CREDITORS SHOULD PREPARE FOR INCREASED BANKRUPTCY FILINGS EVEN AFTER COVID-19 RECOVERY
Normally, during a recession, bankruptcy filings increase. According to information presented recently by Judge Kevin Anderson at the American Bankruptcy Institute’s 2021 Rocky Mountain Bankruptcy Conference, although there was a sharp downturn in gross domestic product in 2020, and unemployment numbers were significantly higher, there was no corresponding flood of bankruptcy filings. Total consumer filings were down 29% in 2020, with chapter 7 cases down 22%, and chapter 13 filings down 43% nationwide.
Here in Indiana, chapter 13 filings were down 42%. In the Evansville Division, chapter 13 filings have been down 65% each month since last April. Business filings are also down. Every state other than Delaware, North Dakota and Texas had significant decreases. Indiana had a 31% decline in business bankruptcy filings.
So what is fueling the non-filings? Delinquencies on consumer loans and credit cards are both significantly down. Unfortunately, the thought is that this does not reflect the actual state of consumer debt, but rather merely a forbearance by lenders from pursing late payments during the pandemic. It is important to note that this forbearance is not the same as debt forgiveness. The debt continues to accumulate, but the consumer is not reported as late.
Basically, consumers do not file bankruptcy unless some event forces them to do so. They wait until the house is under foreclosure, or the car has been repossessed, or the garnishment order has been entered. Since lenders have agreed to forbear on many loans and there has been stimulus cash, these critical events have been delayed. Unfortunately, the delay is probably just that, a delay. When forbearances run out and stimulus payments stop, the delinquencies will remain.
On the business side, COVID-19 increased debt limits for subchapter 5 small business bankruptcies ($7,500,000, up from $2,725,625) are currently scheduled to sunset in March. There may be a rush to the Courthouse by small business debtors in distress to avail themselves of the more favorable subchapter 5 treatment before the sunset.
Unless lenders work significantly to restructure outside of bankruptcy court, the bankruptcy filings will almost certainly follow.