Will Financial Challenges Related to Covid-19 Lead to More Bankruptcy Filings?

TRI Writer • June 9, 2020

With the onset of massive changes in the workplace across the nation, many are wondering if we will see an increase in consumer bankruptcy filings in response to the Covid-19 pandemic. It’s difficult to predict this type of trend, but most do expect the number of consumer bankruptcies to increase.

What Will the Increase in Consumer Bankruptcy Filings Look Like in the U.S.?

It is doubtful that there will be an immediate surge in bankruptcy filings in the next few months. There is a foreclosure moratorium on any federally backed mortgages (which constitutes for two-thirds to three-quarters of all mortgages in the U.S.). Collections on student loans are stopped. Immediate pressure pushing consumers to declare bankruptcy is also currently relieved by support for state moratoriums on debt collections and rental evictions. The increase will likely be seen down the road when financial problems accumulate. Most bankruptcy petitioners struggle for two to five years before they file bankruptcy. They wait, postpone, and keep trying to weather the financial storm. Others delay for pragmatic reasons, deciding it doesn’t make sense to file bankruptcy when debts are going to continue to pile up. Considering these standards supported by past bankruptcy statistics, it’s safe to say that we will likely see a surge in bankruptcy filings after economic recovery. That’s not to say that people aren’t struggling. It’s important to remember that families can struggle financially and not be in seeking bankruptcy.

Bankruptcy and Recession: What We Learn from Past Recessions

If you look through history, increases in bankruptcy filings don’t always coincide with recessions. For instance, the U.S. saw a record high for bankruptcy filings in the late 1990s when the economy was booming. When considering the current situation due to the Covid-19 pandemic, it’s challenging to make straight forward comparisons because we’re facing an unprecedented situation. There is no past analog that serves as an accurate model of how the consumer bankruptcy system will be affected. The closest precedent is the Spanish flu pandemic of 1918, but this isn’t helpful for the current question since the consumer credit system didn’t exist (at least not in a comparable form). We have no historical precedent applicable to the Covid-19 pandemic and how it will affect the consumer’s bankruptcy system.

Can the Bankruptcy Courts Handle a Potential Influx in New Filings?

While bankruptcy professionals agree that we should probably expect an eventual increase in bankruptcy filings, most aren’t comfortable predicting when the influx is likely to occur. However, before the pandemic, the U.S. was at historically low levels of bankruptcy filings, which suggests that the courtrooms and law offices can handle an influx of new bankruptcy cases.

If you have questions about the bankruptcy process or need to discuss the protections offered by bankruptcy , we can help. Find out how to get a fresh start by filing bankruptcy. Get in touch with Kenneth C. Rannick P.C., Tennessee, and Georgia bankruptcy attorney as soon as possible.

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