What's the COVID-19 Pandemic Going to Do to Bankruptcies?

There is no question that the novel coronavirus (COVID-19) pandemic has completely upended the lives of millions of Americans. With stay-at-home orders and social distancing recommendations in effect across the nation, many businesses have had to close, resulting in mass layoffs. Without revenue, without income, both businesses and citizens are likely to struggle financially, which means there is expected to be an increase in bankruptcy filings for those looking for a fresh start.

The question about an uptick in bankruptcy filings isn't about "if" it's going to happen but rather "when." We last saw a substantial increase in bankruptcy filings during the 2008 financial crisis. And although we can use that as somewhat of a comparison with what's going on because of the COVID-19 pandemic, the current crisis is affecting nearly every sector of society in ways they weren't impacted nearly a decade ago.

Not only that, but American consumers had accrued more debt before the COVID-19 pandemic started than they had before the Great Recession. According to the Federal Reserve Bank of New York, in 2008, household debt was at $12.68 trillion. Contrast that with household debt at the end of the fourth quarter of 2019: $14.15 trillion.

With so many people and businesses being affected by the COVID-19 pandemic, the surge in bankruptcy filings may be more substantial than we saw in 2010. There were around 1.6 million filings during that time. Because the current crisis is still in its recency, it's not clear what to expect from those seeking debt relief through bankruptcy. It's also not clear when the increase will begin. We could see them within the coming weeks or months.

What's The Government Doing to Prepare for the Financial Impacts of COVID-19?

Recently, the federal government passed the Coronavirus Aid Relief and Economic Security Act (CARES Act). This measure provides a $2 trillion stimulus for consumers and businesses. In addition to relief payments being issued to some taxpayers, the CARES Act also provides new temporary provisions for bankruptcy filings.

Under the CARES Act:

• The threshold for business Chapter 11 bankruptcy filings will increase from $2,725,625 to $7,500,000
• Coronavirus-related stimulus payments will be excluded as income for Chapter 7 and Chapter 13 filings
• Coronavirus-related stimulus payments will not be considered disposable income for Chapter 13 filings
• Individuals currently making payments under Chapter 13 will have the option to extend payments for up to 7 years

The bankruptcy provisions will be in effect for 1 year.

As part of the CARES Act, federally-funded student loans will also be deferred for 6 months, which will provide relief for over 95% of borrowers.

If you are struggling with debt, contact our Bend lawyers at Baxter Law, LLC to discuss your legal options. We can be reached by phone at (541) 238-9210 or online.