Personal bankruptcy enables filers to wipe their financial slates clean when they are overwhelmed by debt and unable to pay their bills. For consumers and small businesses, Chapter 7 can get rid of much of their individual debt. Also, the bankruptcy court can approve a Chapter 13 plan pay off some or all of the person’s debts gradually over a long period of time, and thereafter, the court can discharge those debts entirely.
It is likely that we will see an increase in personal bankruptcy cases in the near future. Just how large this increase will be remains uncertain. But that isn’t happening yet.
As of the beginning of May 2020, personal bankruptcy cases had not yet increased. In fact, there “were 47% fewer consumer bankruptcies in April 2020 compared to April 2019, according to statistics released by the American Bankruptcy Institute, which is a professional association for lawyers and judges involved in the bankruptcy process.” As you’ve probably read, unemployment claims are at all-time highs, but for now, unemployment checks allow people to pay their monthly bills without having to file bankruptcy. As such bankruptcy filings, year over year, are still down in 2020 compared to 2019.
In addition, some current consumer protections might stave off personal bankruptcy cases. Many homeowners will not be penalized for missing payments on federally backed mortgages right now, for example. Some states have stopped companies from collecting debts and they have stopped landlords from evicting tenants. The federal government has stopped requiring people to make student loan payments to mitigate the financial impact of the pandemic. While these measures are still in place, an influx of personal bankruptcy claims is unlikely.
Once creditors are permitted to pursue people that must somehow catch up on missed payments, people will likely be looking for help, but before filing a bankruptcy petition, people will generally look take several steps. For example, people will often:
• Deplete their savings accounts, including their stimulus checks
• Borrow more money from creditors, often using security, jeopardizing the collateral they use to secure the loan
• Borrow money from their retirement plan, an asset exempt from bankruptcy
• Borrow money from employers
• Borrow money from (and sometimes repay) friends
• Borrow money from (and sometimes repay) family
• Stop making payments to certain creditors.
Although these steps may make sense for some, it’s a good idea to talk to a bankruptcy attorney before taking them, because more times than not, they’ll regret many of these actions. Many assets that would have been untouchable in bankruptcy, such as homes and retirement plans are better left untouched if a bankruptcy is later necessary. Resources such these would often be better utilized after the bankruptcy is complete. And when considering which creditors to pay, and which not to pay, it’s important choose wisely. Lastly, most attorneys will often a free consultation to allow a discussion about whether the moves contemplated by the client are appropriate.
It is very likely that bankruptcies will spike at some point. Most of these government protections are temporary, typically deferrals. Ultimately, people that owe money to creditors will owe more, and will often be in worse shape. This will likely result in a surge in personal bankruptcy claims down the road, but it’s not happening yet.
Howard S. Rabb is an attorney with Dworken & Bernstein, Co., LPA in Cleveland and Painesville.