A Coming Consumer Bankruptcy Tsunami, Wave, or Ripple?

With the Covid-19 pandemic, there has been a lot of talk about a coming surge of consumer bankruptcy filings. In the very short-term, however, bankruptcy filing numbers are down. According to data from Epiq Systems, daily bankruptcy filings declined 18.4% in March 2020 on a year-over-year basis. March 2020 filings were 62,847 as compared to 73,521 in March 2019 but were spread out over one more business day (and hence had an even lower daily filing rate).

The downward trend appears to have continued in April. I say "appear to" because the numbers are down so much that I wonder whether my computations are accurate. Immediate national bankruptcy filing numbers are hard to assemble. Using docket searches on Bloomberg Law that produced all of the bankruptcy cases filed on particular dates, I got the following national bankruptcy filing counts in 2020 as compared to 2019

	2019	2020	decline
last seven days of March	21,656	15,096	-30.3%
first seven days of April	14,886	7,432	-50.1%
second seven days of April	15,602	7,225	-53.7%

If anyone has better data or can confirm these numbers, please leave a comment. Even if these numbers are not spot on, I am confident enough to say there have been big drops in consumer bankruptcy filings the first two weeks in April.

Obviously, these numbers should not be taken as portents that Covid-19 will lead to a decline in the bankruptcy filing rates. Much more likely, they reflect the shutdown of ordinary life. It is far more difficult for clients to get to their lawyers and for lawyers to get to their offices and the courts. As helpful as they are, electronic solutions like telephonic court hearings and 341 meetings are not full substitutes. Perhaps even most significantly, as the crisis unfolds people do not have the money to pay a bankruptcy lawyer.

And there is a larger point to the caution against extrapolating from the short downward trend. Any model predicting consumer bankruptcy filings in this crisis is wrong. Statistical models use past correlations to extrapolate to the future. None of these models have data that include the sort of societal disruptions we are experiencing.

Given the scale of the disruptions, it is difficult to imagine scenarios where bankruptcy filings do not increase. But, there are numerous reasons to wonder about the size of the increase and the time over which it will occur. Federal or state moratoria on debt collections, evictions, and foreclosures may alleviate immediate pressures that cause many consumers to consider bankruptcy. Evidence suggests most people struggle financially for two to five years before filing bankruptcy. Financial problems that begin now may not end up in the bankruptcy court for quite a while. Also, historically, rising consumer debt predicts bankruptcy filings, which makes sense given that bankruptcy is a legal proceeding that forgives past debts. Massive job losses might cause consumers to lose access to credit, meaning there will be less debt on household balance sheets and less demand for bankruptcy filing.

In writing this post, I fear being misinterpreted. In this pandemic, I am not at all sanguine about the financial state of U.S. consumers. Much, much more needs to be done than what has happened to date. This post addresses a very specific thing and that is the rate at which consumers will take the legal step of a formal bankruptcy filing. There can be a tendency to conflate household financial distress with formal bankruptcy. The two are not synonymous. Many more households are financially distressed than file bankruptcy. All I am suggesting here is that the bankruptcy filing rate might not rise proportionally with household financial distress.

Common sense says consumer bankruptcy filing rates will go up. The amount of the increase and the shape of the curve are uncertain. So we can have a consumer bankruptcy system that is ready to handle an increase, how quickly and how much filings will ramp up are important to know. It is just far too early to speak definitively.

Comments

[Ed Flynn]

Excellent post, Bob!
PACER data confirms that filings have been down by a little over 50 percent during the first two weeks of April.
I think consumer filings will rebound somewhat as the country opens back up, but the real surge in filings may not occur for a while.
The CARES Act provides an additional $600 per week to anyone who is eligible for state unemployment. For a single newly unemployed person, this works out to about $3,500 in benefits per month, double that for an unemployed couple.
This means unemployment benefits are now higher than the incomes of most debtors. These benefits are scheduled to last for 4 months; however, I think they will be extended until after the election, because neither party will want to cut benefits to tens of millions of voters prior to the election.
So my current thinking is that:
- Consumer filings will remain at extremely low levels until social distancing rules are relaxed;
- The first wave of consumer filings (pre-election) will include a large number of debtors who don't qualify for substantial Government benefits;
- Unemployment benefits will eventually be reduced or exhausted, and this will lead to a flood of consumer filings;
- The economy will not fully recover from this crisis, unemployment will remain much higher than it has been in recent years, and bankruptcy filings from 2021 forward will remain much higher than they have been for the last 4 years or so.

Of course, business filings are a different story. I expect they will surge considerably in the coming months.

Ed

[John Rogers]

I have been practicing consumer debtor bankruptcy law in a rural area of Kentucky for over 30 years. I think your assessment is "spot on". The surge of consumer filings will be slow in coming and will be ameliorated by the assistance folks get and the length of the quarantines. The large decline in March and April numbers that you show are likely correct and are due to the limbo debtors and law offices have been placed in and, with the law offices, getting up and running to deal with clients virtually. In my assessment, at least in my area, the attorney bankruptcy network is up and running and will be able to take on the task of any surge of any level should it occur.
Thank you for your insight and perception.

[Karen Cody-Hopkins]

Immediate filings are down not just because of the reasons mentioned, but also because there is uncertainty whether bankruptcy Trustees will make any claims for any forms of Stimulus funds. The CARES Act excludes such claims in ch 13s, BUT NOT CHAPTER 7s. The U.S. Trustee put out a statement 4/7/20 [https://tinyurl.com/y8ez4a52] that discourages Trustees from making any claim for CARES Act funds, but a lot of Bk attorneys are holding filings until the smoke clears on whether individual Trustees follow this guidance.

Plus many Bk attorneys are advisibg clients -- that absent an emergency -- to hold off filing in case things get worse. Filing too early will exclude debt debtors may incur in coming weeks or months.

And with maybe 80% of federal loan payment and collection activity suspended through 9/30/20, there is a brather for some debtors.

I think filings will begin a steady uptick by Fall 2020 with a long upward slope with some spikes in it.

[David Anthony]

In Nashville, debtors counsel are reporting that the phones aren't ringing, and the anecdotal commentary is that people aren't filing due to a combination of: lack of access to available counsel (due to the "Safer at Home" orders); a fairly comprehensive suspension of "in person" court proceedings (so no evictions, no collections dockets); the hope that this won't be so bad/the hope of federal funds will save the day; and, most likely, the immediate focus on survival, rather than worrying about unpaid bills.

As strange as it sounds, I think it's likely that bankruptcy filings will not spike until the economy starts to recover, when businesses start to reopen and people begin to go back to work. That’ll be when people can stop worrying about survival and start worrying about digging themselves out a financial hole.

I think we see the spike in June/July.

[Jialan Wang]

Hi Bob!

We're showing similar results from PACER:
https://www.dropbox.com/s/3qjp155vq39lswf/Bankruptcy%20And%20The%20COVID-19%20Crisis%204-17-20%20-%202pm.pdf?dl=0

The punch line - after adjusting for seasonality based on 2019, consumer bankruptcies have been dropping for about a month now, around -40% based on regression estimates. Business bankruptcies are basically unchanged from trend, although from the log specification we can't rule out a moderate ~10% drop during the last month.

The drop is consistent with Google Trends, which to me points to less demand for bankruptcy from consumers, who would swamp the search results for businesses.

Would be happy to connect to share ideas!

[David Hagan]

I suspect people whose incomes have suddenly stopped are living on credit cards, for a while.