We are surprised by the early data about bankruptcy filings following mass layoffs due to Covid-19. Everyone expected filings to increase dramatically with an unemployment rate of 15-20%. However, the data shows that filings actually dropped sharply in the months following March 2020. In Buffalo and Rochester, bankruptcy filings are down by about 40% according to the latest local bankruptcy court statistics
There are many explanations for this in the Media. We think the two main reasons for the decrease are: (1) that people are taking a wait-and-see approach because they do not want to rush to file bankruptcy if the layoffs are only temporary and (2) most people did not have immediate pressure to file because of the enhanced unemployment benefits and the moratorium on foreclosures and evictions.
However, that is going to change in the coming months. The one-third of Americans who have skipped mortgage or rent payments will have to deal with those payments at some point. The moratoriums are already starting to end in many places. Also, it is clear that many short term job losses will become permanent. We do not see any scenario in which the economy fully recovers for two years, as we think there will be a series of openings and closings in response to Covid-19 rates. Foreclosures and evictions will eventually reach rates seen a decade ago during the Great Recession.
Typically, bankruptcy filings start to increase when the economy starts to recover, not at the beginning of the downturn. This makes sense because when people do not even have enough money to pay rent or utilities, dealing with credit cards and medical bills is relatively less important. Once a person’s income situation improves, that’s when they have more exposure to things like wage garnishments.
We expect chapter 7 and chapter 13 bankruptcy filings to increase by 25 percent in 2021 and by 50 percent in 2022. These are conservative estimates. While no one may be rushing to file bankruptcy right now, the economic pressure on millions of Americans will continue to mount for a long period to come.