Bankruptcy filings fell in 2021, but post-COVID ‘shadow debt’ may spell trouble

When the pandemic hit the U.S. economy last spring, some observers said it was only a matter of time before consumers turned to bankruptcy to get rid of their debts.

The trend has continued so far this year. The nearly 181,000 bankruptcy cases filed by May 2021 are 29% lower than the same point last year, according to statistics compiled for the American Bankruptcy Institute.

Now, a new study suggests the wait will continue – and perhaps at a high cost to those facing growing debt.

By filing for Chapter 7 bankruptcy, Chapter 13 liquidation or bankruptcy, an installment plan, people and their creditors can make court-approved arrangements to pay off balances and pay off debts.


People wait an average of 22 months after their first 90-day notice to file for bankruptcy.


– Researchers from Brigham Young University and MIT Sloan School of Management

But it can take a while to get there, with people waiting an average of 22 months after their first 90-day notice to file for bankruptcy, according to researchers at Brigham Young University and the MIT Sloan School of Management.

“For the average consumer, by delaying bankruptcy, he is probably digging a deeper hole,” said Ben Iverson, a finance professor at BYU and one of the study’s authors.

“A lot of this increase comes from what we call ‘ghost debt’, which is debt that doesn’t show up on credit reports,” he said. This includes debts like bad checks, unpaid rents and some medical bills.

The new study is consistent with previous research examining the period leading up to bankruptcy. Two-thirds of those polled in a previous study said they had “seriously struggled” with debt for two years before filing a claim, according to a 2018 study.


Phantom debt is not included on credit reports and includes debts like bad checks, unpaid rents, and some medical bills.

The new findings have put a price on waiting. Borrowers accumulated an average of $ 4,000 in unsecured debt for each month they are late in filing, the researchers said.

Unsecured debt means that it is not backed by collateral like a house. Two forms of unsecured debt are overdue credit cards and medical bills.

“Phantom debt” can also increase by an average of $ 7,200 for every month you are late filing, according to the study.


Overall, people owed an average of $ 240,000 by the time they filed for bankruptcy, according to the latest research.

Overall, people owed an average of $ 240,000 by the time they filed for bankruptcy, according to the latest research. They combed through more than 550,000 consumer bankruptcy cases filed between 2001 and 2018 at the time of writing, which was distributed this week by the National Bureau of Economic Research.

Rather than reducing the benefits of the financial fresh start of bankruptcy, the authors said another idea might be to encourage “potential defaults to file for bankruptcy more quickly in order to free up cash flow for future consumption.”

Of course, filing for bankruptcy is a serious step people shouldn’t rush into.

For example, a Chapter 7 bankruptcy stays on a person’s credit reports for 10 years and a Chapter 13 bankruptcy is removed from credit reports 7 years after filing.


Chapter 7 bankruptcy stays on a person’s credit reports for 10 years. Chapter 13 is deleted from credit reports for 7 years.

Meanwhile, a person’s credit score may go down and it can be more expensive for them to get loans. It also clears the credit history before that point and, as one bankruptcy attorney once said, that history may be worth erasing.

As bankruptcy cases continue to decline for the time being, the economy is rebounding from the shock waves of 2020. For example, the unemployment rate in May hit a pandemic low of 5.8% and job vacancies reached a record 9.3 million in April, amid a labor shortage.

It remains to be seen, therefore, the timing and extent of any increase linked to the pandemic of consumer bankruptcy cases.

“The federal government’s continued stabilization efforts, lender abstention, and low and sustained interest rates have helped keep many businesses and households afloat during the crisis,” said Amy Quackenboss, executive director of the American Bankruptcy Institute, when the organization released the May filing figures.

“As relief from the pandemic unfolds, however, growing financial challenges may cause more households and businesses to seek shelter from bankruptcy,” she said. .

The new study was working on data from pre-pandemic bankruptcy cases, Iverson said. Thus, the effects of pandemic-related initiatives like Supplemental Unemployment Insurance have not been included, he said.

Bankruptcies typically don’t happen without a trigger, such as a wage garnishment, foreclosure, or a foreclosed vehicle, noted Iverson. The multitude of moratoria – like the Centers for Disease Control and Prevention’s pause on evictions – help explain the drop, he said.

But the CDC’s deportation hiatus is currently set to expire on June 30, and a court challenge to effectively end the hiatus earlier is pending in the Supreme Court.

Whenever the various moratoriums expire, Iverson has said he expects “bankruptcy rates to start rising as debtors start to face the music.”

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