Traditional Signs Pointing To Potential Surge In Bankruptcy Cases… But Does Covid Change Things?

Since 2008, trends in personal bankruptcy filings have strongly correlated with  two indicators: Unemployment rate and missed mortgage payments. The former can  create a liquidity shock in the near future while the latter is a result of such a shortage that  traditionally signals a more imminent need to file for bankruptcy.

However, the current surge in unemployment has been primarily driven by  artificial conditions created by state governments’ stay-at-home orders in response to the  COVID-19 pandemic. In past economic cycles, sudden increases in unemployment were  a result of recessions or system shocks that occurred naturally in the market rather than  from intentional government decisions to stall or freeze economic activity. Moreover, this  sharp increase in unemployment may have largely been temporary versus permanent job  losses that occur in typical recessions. This possibility is supported by shrinking  unemployment numbers where unemployment peaked at 14.7% in April 2020 and fell to  7.9% as of September 2020. Additionally, the normal liquidity shock that preempts an  increase in bankruptcy filings may have been partially mitigated by the CARES Act  where many Americans received a one-time stimulus of $1,200 along with access to  bolstered unemployment assistance through July 31, 2020.

The unique market conditions created by COVID do not end there. Typically,  missed mortgage payments will result in the risk of foreclosure which strongly motivates  an individual to file for bankruptcy to protect their most important asset — their home.  Recently, there has been a rush to create mortgage forbearance programs both by the  government as well as by private lenders. The government has a motivation to maintain  the public-interest by preventing an avalanche of foreclosures while private lenders have  a profit-motive to keep the market from flooding with foreclosed properties which would  drive down the value of their assets which have seen gains in value following the 2008  recession. The good news is that foreclosures have dropped sharply compared to last  year by 81% according to a Q3 2020 report by ATTOM Data Solutions.

Although the income and increased unemployment assistance has been stopped,  mortgage assistance programs are still ongoing and the federal government has passed a  moratorium through the New Year on any federally backed mortgage loans while private  lenders continue to work with borrowers on their own forbearance programs. Only time  will tell if these actions by the government will curtail an eventual spike in bankruptcy  cases, but so far there has been a sharp decline in filings when compared to the last five  years.

Despite positive signs for some, many Americans still find themselves struggling  to make ends meet. As of July, 2.25 million mortgages were at least 90 days late and  although unemployment numbers are improving they are still less than ideal.

Are you facing unemployment or the risk of losing your home when forbearance

assistance ends? It would be a good idea to begin exploring bankruptcy as an option to  see if you can receive debt relief.

If you have any questions about filing bankruptcy please feel free to reach out to  your Stockton bankruptcy attorney at 209-952-0355