Fewer Americans filed for bankruptcy in 2020 than in 2019
To say that the pandemic has been tough on the US economy would be an understatement. The unemployment rate, which was only 3.5% in February, is now 7.9%; there are 10.7 million fewer jobs today than six months ago; a quarter of the workforce works from home. You might expect such gloomy economic conditions to be accompanied by an increase in bankruptcies. But so far this year, bankruptcy filings are down 27%.
In one new paper, researchers at the University of Illinois, Brigham Young and Harvard collected data from online court records to estimate the impact of the covid-19 pandemic on bankruptcies. They found that, unlike past economic cycles, when deteriorating economic conditions led to more bankruptcies, this slowdown actually produced less. Deposits declined by nearly 140,000 in the first eight months of 2020, compared to the same period in 2019. Personal bankruptcies decreased by 28%; business bankruptcies by 1% (see graph).
While it looks encouraging at first glance, the details are less rosy. Take business bankruptcies. The authors note that deposits under Chapter 7, part of the U.S. bankruptcy code used primarily by small businesses wishing to outright liquidate and sell their assets to pay creditors, fell 13 percent, year over year. the other. But the decline in Chapter 7 filings was more than offset by a 35% increase in Chapter 11 filings, the form of bankruptcy covered in U.S. newspaper business pages involving larger companies aiming to restructure their debts and bankruptcy. continue their activities. Chapter 11 deposits by companies with more than $ 50 million in assets increased by almost 200%.
The authors argue that small businesses have had a harder time accessing the bankruptcy system during the pandemic, which has delayed filings. Social distancing measures have forced bankruptcy courts to hold hearings by phone or video conference, rather than in person. Some courts have been completely closed. The pandemic has also made it more difficult for business owners to avail legal services. And while large businesses look to bankruptcy as a source of protection, small businesses see it as a last resort.
Consumer bankruptcies, for their part, fell by more than a quarter over the year. Deposits under Chapter 13 of the code, which allows individuals to keep their assets and engage in a repayment plan, fell 41%. Chapter 13, in this case, is mainly used by the wealthier people and homeowners. These households, according to the authors, may have been less affected by the economic downturn and have been aided by government interventions such as the mortgage moratorium mandated by the CARES Act (the coronavirus relief program of 2.2 billion dollars was enacted in March). Chapter 7 consumer reports, typically used by people with low incomes and less assets, fell 20% between January and August. Both types of deposit have declined more in states with high unemployment than in those with low unemployment: further evidence that in times of crisis those already worst off are often hit hardest.