Bankruptcies track the financial climate as companies and consumers pursue relief from macro-economic disruptions. During the COVID-19 crisis, though, this relationship has flipped around. Despite media reports and many experts’ expectations on how the coronavirus and bankruptcy would interact, consumer and small business filing have sharply declined since mid-March 2020.
Despite accounting for a limited proportion of all bankruptcies, the number of Chapter 11 filings by major companies has risen since 2019. Consumers, small companies, and multinational firms have had different financial experiences during the COVID-19 crisis. Large companies have pursued and obtained bankruptcy protection as they would in a typical recession. Comparatively, affluent households have benefited on average from the fiscal stimulus and housing moratoria mandated by the CARES Act and other initiatives. Non-homeowners and small companies, on the other hand, may face financial, physical, and technical obstacles to filing for bankruptcy, especially in areas where unemployment is high.
Chapter 7. Small businesses and consumers file for Chapter 7 to discharge debts.
Chapter 11. Generally used by larger corporations, chapter 11 is known as the reorganization bankruptcy to pay creditors over time.
Chapter 13. Allows the filer to keep their property and repay debts over a period of three to five years.
How COVID-19 Changed the Economy
The COVID-19 pandemic has devastated daily life in the United States and caused a significant economic decline, with drastic losses in consumer spending and the highest unemployment rate since the Great Depression.
Congress and the Federal Reserve responded swiftly in response to the recession, including a $600 weekly rise in unemployment rates through the Federal Pandemic Unemployment Compensation (FPUC) program, $1,200 stimulus checks, and over $1.2 trillion in loans through the Paycheck Prevention Program (PPP) and Main Street Lending program.
Have Bankruptcy Filings Increased?
During this year’s economic crisis, caused by COVID-19, bankruptcy filings in the United States were predicted to skyrocket. Instead, they plummeted by 27% due to a dramatic decline in customer and small business filings.
The findings are contrary to modern economic trends. Employment failure is the primary source of customer bankruptcy filings. The rate of job loss in 2020 was the largest since the Great Depression. Around the same time, we saw a significant drop in the number of people filing for bankruptcy.
The fact that many people were spared from filing for bankruptcy may be construed as comforting. However, there might be explanations why people didn’t. For example, they didn’t have access to the court system or couldn’t afford to file at the time.
Many unemployed people likely avoided bankruptcy due to federal assistance from the $1.2 trillion recovery bill known as the CARES Act. State and municipal governments briefly suspended evictions and foreclosures, federal authorities, and corporations.
While experts expected an unprecedented rise in bankruptcy filings, the opposite has happened. Big companies are not reluctant to take advantage of the generous debt forgiveness and reorganization opportunities that the US bankruptcy scheme offers. For this reason, small companies and customers shouldn’t be reluctant to take advantage of such benefits if they are appropriate for them.