Personal bankruptcies set to increase in 2021 when the recovery ends

As stimulus checks and other forms of temporary relief run out, experts predict an increase in personal bankruptcy filings, which have so far been eased during the coronavirus pandemic.

Only a new stimulus program targeting individuals or government actions who forgive or postpone student loans can prevent individual deposits from increasing, panelists said at an American Bankruptcy Institute conference on Tuesday. online.

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The $ 2.2 trillion Cares Act passed by Congress in March broadened unemployment benefits, extended their duration and increased their amount by $ 600 per week, but those additional payments have expired.

Congressional Democrats and the White House continue to negotiate another economic bailout plan, which could restore some of the unemployment benefits that have expired, although prospects for a deal have darkened ahead of the election.

“Clearly, when it comes to personal bankruptcy filings, it’s about accessing cash,” said Ed Flynn, editor of the American Bankruptcy Institute Journal. “With the end of the Cares Act, there will be a slight increase in deposits. The only question is whether it will be a sharp rise or a gradual rise. “

Personal bankruptcies are expected to fall this year to 560,000, the lowest number since 1985, Flynn said, citing data collected by the US Courts Administrative Office. But next year, that total could climb to over a million, he said.

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The number includes all deposits under Chapter 7 of the Bankruptcy Code, the type most commonly used for personal bankruptcies, as well as Chapter 13, which allows individuals to establish a payment plan for their debts. Some companies apply for Chapter 7 to sell all assets and liquidate their businesses, but the overwhelming majority of Chapter 7 filings are personal bankruptcies.

Along with the increase in job losses, student loans are likely to be a major driver of the increase in personal bankruptcies, the panelists said.

Household debt has grown 13% since the 2008 financial crisis, and most of that increase comes from student and auto loans, according to Federal Reserve data. The total amount of mortgage and credit card debt has remained largely the same since 2008.

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President Trump has extended temporary relief for federal student loan borrowers, allowing them to defer payments until the end of the year from the end of September.

“I am concerned about a flood of cases filed by working families,” said Deirdre O’Connor, sales and corporate restructuring manager at legal services firm Epiq Systems Inc., speaking during the conference.

Moratoriums on evictions have also been a factor in controlling personal bankruptcies, said Christopher Kruse, senior vice president of Epiq, on the same panel.

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“When people are about to be evicted from their homes, that’s when bankruptcies hit, because by filing a return you can stay in your home for a few more months,” he said. .

Write to Soma Biswas at soma.biswas@wsj.com

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