(CN) — Despite dire outlooks, U.S. bankruptcies continued on a four-year decline through the Covid-19 pandemic according to research published by the Administrative Office of the U.S. Courts on Monday.
One key reason: economic relief.
According to the report, "increased government benefits and moratoriums on evictions and certain foreclosures may have eased financial pressures in many households."
Bankruptcy filings often climb side by side with unemployment rates. With unemployment peaking at 14.8% in April 2020, some economists therefore expected a subsequent hike in evictions, foreclosures and bankruptcies.
The $1.2 trillion CARES Act signed in March 2020 seems to have stanched some of the economic bleeding. The unprecedented stimulus package paid out stimulus checks, increased unemployment benefits, and placed moratoriums on evictions and foreclosures.
Between September 2020 and September 2021, bankruptcies fell nearly 30%. Less than half a million individuals, 434,540 declared bankruptcy during that time period, compared with 615,561 a year prior. The 2021 figure includes 16,140 business and 418,400 non-business filings.
This marks the lowest year of bankruptcy filings since 2017 which saw 790,830 filings. Roughly 70% of 2021 filings were for Chapter 7 bankruptcy and a quarter for Chapter 13.
“Bankruptcy is one of the indicators that show the health of the economy, because bankruptcy means the financial distress of households and small businesses or large businesses,” explained Jeyul Yang, a doctoral candidate at the University of Illinois who co-authored an analysis of the trend last year.
“Our finding is that the government’s moratorium on debt repayment or foreclosure is the most prominent factor which people prevented from filing bankruptcy,” Yang said, adding that the trend was apparent in both state and national data.
While the paper also posed court closures and a lack of liquid cash needed to cover filing fees as other possible variables, the economists have since ruled these factors out.
With bankruptcy filings at 55% of what they were last year and federal aid timing out, many economists expect some kind of increase in bankruptcy filings to be on the horizon.
“Eighteen months plus after the pandemic began, there's concern that some of these deferments are starting to roll off and some of the bigger impacts of Covid-19 for some folks have yet to happen,” explained Aaron Klein is a senior fellow in economic studies at the Brookings Institution.
The Federal Housing Administration lifted the eviction and foreclosure moratorium at the end of July. The Federal Pandemic Unemployment Compensation program expired on July 31, 2020.
How effective federal aid was in preventing the economic damages depends largely on individual financial situations.
“If you're going to have a job for 20 of the next 21 years and the one year you don't is during Covid-19, just pushing back your loan one year can fix a lot of things,” Klein said. “On the other hand, if you're still in an unsustainable situation, even when the economy reverts back to normal in the post Covid-19 world then the fundamental problem was not solved.”
Still there are lessons to be learned in how the country responds to future recessions and crises.
“I hope that one of the lessons we've learned from Covid-19 is that having a stronger social safety net solves more problems,” Klein said. “When people lose their job through no fault of their own, having stronger unemployment insurance benefits makes their lives and society’s lives better.”
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