(CN) — Straying from historic norms, bankruptcy filings by individuals and small businesses fell sharply in 2020 despite record levels of unemployment caused by the Covid-19 pandemic.
The volume of bankruptcy filings in the U.S. has historically tended to closely reflect the economic cycle and unemployment rates, with the top cause of filing by individual consumers being job loss.
But 2020 was different.
After a year of Covid-19 related business closures and staff reductions, the national unemployment rate in December was 6.7%, 3.1 percentage points higher than unemployment during the same time in 2019.
According to the U.S. Bureau of Labor Statistics, unemployment rates increased significantly in 45 states and the District of Columbia from December 2019 to December 2020.
Even though the U.S. last year recorded the highest rates of unemployment since the Great Depression, a report released by the Administrative Office of U.S. Courts this week shows that the number of bankruptcy filings actually decreased dramatically.
According to the report published on Thursday, bankruptcy cases dropped 29.7% from 2019 to 2020. The total number of bankruptcy filings was the lowest since 1986 when only 530,438 bankruptcies were filed, according to the report.
Experts in bankruptcy law, as well as some media reports, had predicted an increase in bankruptcy filings to coincide with the high levels of unemployment.
“I would have expected an increase in consumer bankruptcies by the third quarter of 2020,” Brad Botes, a partner at Bond & Botes Law Offices, told Courthouse News in an interview.
However, there were a total of 544,463 bankruptcy filings last year, compared with 774,940 cases in 2019.
The report noted that bankruptcy filings can lag behind other economic indicators. For example, new bankruptcy filings following the 2007-9 Great Recession did not peak until 2010.
Unlike the recent economic downfall caused by the Covid-19 pandemic, however, bankruptcy cases had continued to climb during the Great Recession as expected.
The number of filings last year began to rapidly fall in March when, as the Administrative Office points out, many courts began to limit public access in order to prevent the spread of Covid-19.
Botes, who has about 30 years of experience in bankruptcy law, said there are multiple factors that contributed to the unexpected decline in bankruptcy cases.
Enhanced unemployment compensation passed by Congress, alongside stimulus funds and legal protections against evictions, may have prevented individuals from filing bankruptcy cases last year, he said.
The Coronavirus Aid, Relief, and Economic Security Act was signed into law on March 27, giving states the option of extending unemployment compensation to independent contractors and other workers who are ordinarily ineligible for unemployment benefits.
That month also saw the passing of the Families First Coronavirus Response Act, which provided additional flexibility and administrative funding for state unemployment insurance agencies.
“Even mortgage servicers and automobile creditors that are not federally backed gave people more flexibility and were slow to foreclose or repossess,” he said, partially attributing this to lessons learned in 2009 when servicers in these industries were quick to do so.
The lack of bankruptcy filings does not imply consumers were left in an overall better financial situation.
Rather, the attorney said, the temporary help may have stopped many people from declaring bankruptcy while their immediate needs like transportation and housing were met.
But, these “quick-fix” solutions do not support consumers in the long term and many will end up owing months of back rent, mortgage payments or car payments, he said.
Botes said he expects to see a significant uptick in consumer filings, especially Chapter 13 filings, as some of these temporary modifications expire.
Chapter 13 offers the same, if not more, benefits for individuals that Chapter 11 does for businesses, Botes said.
Chapter 11 reorganization filings were the only category to rise in 2020, according to the U.S. Courts report. This type of bankruptcy filing, which was mostly used by large businesses, increased 19.2%, from 6,808 in 2019 to 8,113 in 2020.
“Hopefully, the average consumer will overcome a reluctance to explore bankruptcy relief,” Botes said, noting that individuals often don’t want to acknowledge when filing for bankruptcy might be their best option.
The Bar Association and bankruptcy courts nationwide will most likely be ready to handle the potential influx of new filings, he predicts, especially because courts have largely adapted to Covid-19 safety concerns by managing proceedings virtually.
“People need to be prudent with the decisions they make,” Botes warned, “When consumer filings increase, less experienced attorneys turn to bankruptcy practice to make a quick buck.”
He said it is important for individuals considering bankruptcy to look for experienced professionals in the field, and recommends working with legal professionals who are members of the National Association of Consumer Bankruptcy Attorneys.