Have Bankruptcies Actually Decreased In The US Since COVID Began In 2020?
Bankruptcy cases filings have been on a steady decline in the United States since 2012 when nearly 1.2 million cases were filed. When the COVID-19 Pandemic began in March of 2020, bankruptcy cases continued to decline. The primary explanation for the recent continued decrease in bankruptcy filings remains the historic government intervention to address the widespread economic crisis that occurred at the onset of the pandemic.
The Paycheck Protection Program (“PPP”) a new program administered by the SBA with eligibility for sole proprietors and single member Limited Liability companies promptly provided access to partially forgivable loans that measurably helped businesses weather the uncertain times. The loans would be forgiven if upon application the company could provide documentary proof that at least 75% of the loan were used for operating expenses such as rent and payroll.
Secondly, the federal government for the first time instituted a student loan deferment for borrowers who had undertaken an educational loan insured or guaranteed by the federal government. With the pause, graduates did not have to make interest or make any other payments on their loans until December 31, 2022 a time period lasting almost 3 years. Any interest that would have been added to the loan balance during the term of the deferral was not added to the borrowers outstanding loan balance.
Furthermore, the Small Business Administration (SBA) dramatically increased the target and scope of the Economic Injury Disaster Relief Loans (EIDL) program. In the past, these loans were provided to individuals businesses who had experienced damage from hurricanes, major flooding events, and other natural disasters. With an interest rate of 3.75% and deferred initial first payment date well over a year from the loan funding, these programs that provided needed cash flow to businesses and individuals prevented potential bankruptcies.
Finally, the expanded unemployment benefits and child tax credits instituted during the pandemic resulted in a material infusion of cash into the economy to avert a significant recession. The positive effects of those interventions helped to keep individuals and businesses afloat.
Bankruptcies are currently at their lowest since 1985. Still, there are signs that the lifting of the foreclosure and eviction moratoriums and other measures limiting action by creditors has resulted in some increase for case filings at this time.
Will The Number Of Bankruptcy Filings In The US Increase In 2022 And 2023?
Most economic indicators especially the persistent presence of inflation and a declining stock market indicate a likely increase in bankruptcy filings over the next year or two. Despite this expected increase, the effect will not be immediate.
Currently, at a national level, Chapter 13 cases have risen at a higher rate than Chapter 7 liquidation case. The most plausible explanation is because foreclosure and eviction actions prevented by the federal and state moratoriums are no longer in effect. This resulted in significant backlogs of landlord-tenant and foreclosure matters that the courts are now addressing.
Court hearings to evict tenants and or foreclosure sale dates on long-dormant foreclosure cases have caused individuals and businesses to consider bankruptcy relief.
Do Rising Interest Rates Tend To Lead To An Escalation In Bankruptcy Filings?
Rising interest rates over time are one of many factors that can contribute to an increase in bankruptcy filings. Currently, the most critical factor aside from the cost of borrowing is the inflation rate approximating 9%. Rising Interest rates always increase the cost of borrowing for cars, other major purchases and home loans.
However, credit card debt interest rates have always generally been fairly constant at well over 20%. I do not anticipate interest rates to result in a material change to these rates. Transportation and food costs are higher, whereas the cost to purchase real estate and tenant’s rents have increased considerably. Inflation accompanied by the decline in consumer confidence in the economy it causes diminishes people’s spending ability and results in higher consumer debt that represents the primary cause of the need to consider Bankruptcy relief.
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