Consumer Bankruptcies Not Increasing--Yet

 Posted on May 18, 2020 in Financial Crisis

After declining significantly since 2010, consumer bankruptcies edged up in 2019, increased in March, then oddly sharply declined in April.

In the last two weeks three major retailers filed Chapter 11 bankruptcy: J. Crew, Neiman Marcus, and J.C. Penny. Total business Chapter 11 reorganizations were up 26% in April 2020 compared to the same month last year. (560 compared to 444.)

What about consumer bankruptcy filings? What has happened so far, and what’s to come?

Consumer Bankruptcy Filings So Far

Since the Great Recession, consumer bankruptcy filings had been declining. They’d topped out at more than 1.5 million filings in 2010, then came down steadily for almost the full decade. Only half as many consumer bankruptcies were filed in 2018, about 751,000. Then in 2019 the number nudged up for the first time since the Great Recession, although just barely. Annual Business and Non­-business Filings by Year (1980­-2019).

So what about the first few months of 2020? The last couple monthly totals are very unusual. After holding steady during January and February, there was a significant uptick in filing in March. Consumer filings increased 12% that month from the prior month (from 53,087 to 59,668). But then in April filings plummeted, dropping 39% (down to 36,161 for the month).

What’s going on? Common sense says that as the reality of the pandemic set it, people who had been on the brink, and/or started getting hit economically, and rushed to file. That accounts for the March increase.

Then when states started shutting down in late March and early April, connecting with a bankruptcy lawyer to start the bankruptcy process became more difficult. Plus the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) passed in late March. People have been waiting to see if the one-time relief payments, and its enhanced unemployment benefits, would help enough. These account for the sharp decrease in April filings.

What’s Happening Soon

In the last 8 weeks 36.5 million Americans filed unemployment claims. Countless others are working less hours and/or for lower pay.

According to one recent poll 77% of laid off workers believe they’ll get their jobs back “after stay-at-home orders are lifted.” That may well be overly optimistic. Millions of businesses face deep financial stress because of the pandemic. Many will not reopen. The health safety changes required by the virus will add costs and reduce income for entire industries. Restaurants, transportation, and retail are obvious examples. Businesses with thin financial margins will either not reopen or will try but won’t succeed. As part of a recent Time magazine article title says, A Flood of Small Business Bankruptcies Likely in Coming Months.

On top of all that, states and local governments are sharply losing tax revenue so job cuts are inevitable.

Even among those who do get back their jobs, those without enough savings will be left with an income hole. Many will need bankruptcy relief.

According to Amy Quackenboss of the American Bankruptcy Institute, “We think business filings will see an uptick in April with consumer filings to surge in May and June.” She said this in early April. She was accurate about the April business filings. She’s likely right about the consumer filing surge as well.

Household Debt Burden

One very reliable indicator of future consumer bankruptcy filings are the amount of household debt and its delinquency rate. Here’s a comparison of these two just before the 2008-09 Great Recession vs. just before the COVID-19 pandemic.

While mortgage and credit card debt is only modestly higher now, vehicle loan debts are up 63% and student loan debt has nearly tripled.

The delinquency rate overall was recently virtually as high as it was just before the Great Recession. Back then that resulted in a doubling and then nearly tripling of consumer bankruptcy filings between 2006 and 2010. The even worse household debt burden and delinquency rate pre-pandemic foretell a similar new surge in bankruptcy filings.