COVID-19 has caused real financial pain. So why did consumer bankruptcies fall in 2020?

By many measures, the pandemic caused all kinds of financial stress last year. But consumer bankruptcy cases, a way to address financial pain and deepening debt, plummeted in 2020. There was a 30% drop in all bankruptcies year-over-year, dropping to 529,071 from 757,634 a year earlier, based on data provided by the American Bankruptcy Institute. , a professional association. Last year 496,565 consumer bankruptcy applications were filed, the lowest since 1987 and a 31% decrease since 2019.

Business bankruptcies were reduced in 2020, except for Chapter 11 filings to restructure debt obligations, the ABI said. Those submissions, which included prominent retailers shaken by the coronavirus such as Neiman Marcus, J.Crew and JCPenney, were up 29%.

That information comes amid many grim statistics about the financial health of Americans: From August to December, more Americans said they had not eaten enough and that it was difficult to pay typical household expenses, according to the US Census Bureau. Unemployment rates have improved from their double-digit figures in early spring, but last month marked the first drop in jobs since that rebound began. The unemployment rate in December was 6.7%. Meanwhile, household savings rates continue to fall nationally, and more than a third of people say they are operating in financial “survival mode.” Stimulus money, state reopens, and eviction moratoriums may have helped with a bull market for years and low unemployment rates for decades. Still, the steep drop in 2020 “surprised a lot of people,” said Amy Quackenboss, executive director of the American Bankruptcy Institute, including herself. In early spring, Quackenboss said an increase in consumer bankruptcy cases would begin in May and June. Now he says there are several reasons why his prediction didn’t work, starting with the success of the $ 2.2 billion CARES Act.

“The eviction and foreclosure moratoriums postpone the time when people need to take action just to keep a roof over their head, according to attorney William Kransdorf. ”

“I think the depth and breadth of the stimulus packages are doing their job,” he said. State reopens in late spring and summer could have prevented or delayed bankruptcy for some, he added, and people may have kept putting off filing because they were waiting to see what was in another stimulus package. President Trump signed a second $ 900 billion aid package late last month. Other observers have their own theories. The moratoriums on evictions and foreclosures postpone the time when people must take action just to keep a roof over their head, according to attorney William Kransdorf. The Centers for Disease Control and Prevention announced the national eviction moratorium in September, and its December 31 deadline was pushed back to January 31 in the second aid package. A hiatus in foreclosures for mortgages backed by the Federal Housing Administration runs until February 28. Without these kinds of “triggers,” people are “putting off the things they can put off,” said Kransdorf, director of the NYC Bankruptcy Assistance Project at Legal Services NYC, which provides civil legal services to low-income people. Kransdorf and his staff filed 100 cases last year, half the number of filings in 2019. He saw a small increase in cases in the fall, beginning about a month after the CARES Act money for car insurance ran out. $ 600 supplemental unemployment. Immediate financial pressures may force a decision to be made, but your absence may prolong the process. “Filing for bankruptcy is really cool when debt collectors are at your doorstep and ready to take your things,” said Pamela Foohey, visiting professor at Yeshiva University’s Benjamin N. Cardozo School of Law.

“Another possible reason for the decline in filings in 2020: Someone could be so starved for cash that they can’t even afford the bankruptcy process right now. ”

But Foohey, who wasn’t surprised by the 2020 filing drop, said many people often take several years to get out of the red before going bankrupt. It took two years after Lehman Brothers’ bankruptcy in 2008 to reach a recent high of $ 1.59 million in 2010, the cases show. “People want to pay off their debts and are eternally optimistic that their financial situation will become more optimistic,” Foohey said. Another possible reason for the decline in filings in 2020: Someone could be so short on cash that they can’t even afford the bankruptcy process right now, Foohey said. For many, he said, “the time to file is when they have overcome the catastrophe” and have sources of income for lawyers and creditors. But the current fee for legal representation could be around $ 1,300 upfront for a Chapter 7 case and $ 3,800 extended in a Chapter 13 case, Foohey said. (In a Chapter 7 case, a consumer sells assets to pay off creditors and settle debts. In a Chapter 13 case, a debtor pays in an installment plan, usually between three and five years). Those sums can be especially prohibitively expensive now. “That would advise, ‘Let’s wait,'” Foohey said. Quackenboss, Foohey and Kransdorf agree that bankruptcy cases will at some point recover, but the timing and scope are unclear because there are many variables at play. These include questions about the number of proposed $ 2,000 stimulus checks, additional unemployment benefits, or the 2021 job market that can bring people out of insolvency. Another question is how much medical debt incurred during the pandemic will translate into future cases, Quackenboss added. Before roughly 15 million people lost employer-sponsored health coverage in 2020, a 2019 study found that people were twice as likely to file for bankruptcy if they went without coverage for up to two years. “The stigma of bankruptcy is real” Another hurdle can be emotional. “The stigma of bankruptcy is real and it is regrettable,” Quackenboss said. “The purpose of bankruptcy is to give people a fresh start.” Filing for bankruptcy has long-lasting consequences. For example, a bankruptcy is kept on a credit report for seven or 10 years from the filing date, depending on the type of petition. Erase credit history before that point, Kransdorf said, and that might not be a setback for someone who already had derogatory information on file. Anyone considering the idea should think like a company, Kransdorf said. “Corporations make decisions to file for bankruptcy that are devoid of shame or a sense of moral failure,” he said. “People need to make the same kind of decision. You don’t need to worry about bankruptcy as a sign of failure or moral failure. It’s none of those things. “In fact, it may even be a boon for the economy. Bankruptcy” will be a very important tool to recover from the disaster that caused COVID-19, “Kransdorf said.” It benefits the banks that people get rid of debts that they will never be able to pay, so they can get back into the economy and generate income, “he said.