The COVID-19 pandemic caused a financial pandemic, similar to what the world experienced during the Spanish Flu of 1918. The implementation of lockdowns and other movement restrictions compromised people’s ability to earn a living.
Many financial experts predicted that the number of bankruptcies would increase significantly due to the many constraints that COVID-19 brought to the economy, including an increase in unemployment. But that simply didn’t happen.
In this blog, we’ll explain why bankruptcy filings didn’t rise the way many expected during the pandemic and what that could mean if you’re dealing with debt today.
If you’re unsure where you stand or what your next step should be, the Birmingham bankruptcy lawyers at Nomberg Law Firm can help you make sense of your options. Learn more by scheduling a free consultation.
Did job loss and bankruptcies increase during the pandemic?
The answer is mixed. A report by the U.S. Bureau of Labor Statistics showed that the average unemployment rate tripled from 3.6% to 13.0% in 2020. However, the damage was mostly felt at the lower end of the labor market, as the majority of jobs lost were occupied by workers in the bottom quartile of wage earners, according to a report by the Economic Policy Institute.
Those are the kinds of jobs offered by the hard-hit hospitality and restaurant industries, where many companies and businesses were simply closing their doors rather than filing for bankruptcy or seeking a capital infusion to work out settlements with their creditors.
A 2021 report by the U.S. Courts showed that the number of bankruptcies in the U.S. actually declined by over 25%. The decrease in bankruptcy filings is contrary to modern-day financial market patterns. Usually, the filing of bankruptcies in this country increases relative to economic issues like high unemployment rates.
However, things were quite different during the COVID-19 pandemic. There were moratoriums prohibiting foreclosures and evictions. There were also various rounds of PPP loans and stimulus money checks from the U.S. government in an attempt to offset the financial hardship felt by Americans.
Reasons behind the decrease in bankruptcy filings during COVID-19
Financial experts have attributed the decrease in bankruptcy filings to various issues, depending on the individual’s economic capabilities and awareness level in maintaining such financial obligations.
Federal stimulus money, forbearance from lenders, and reduced collection actions have been crucial in keeping many families and businesses afloat during the pandemic. Let’s take a closer look at each of these below.
The stimulus checks
During the pandemic, the U.S. government implemented the Federal Stimulus Package, which helped address the needs of businesses, taxpayers, business organizations, and other individuals during COVID-19.
Stimulus checks also helped further the economy as consumers had more money to spend, but these solutions had limited timespans. When the government stopped handing out money, some Americans found themselves unable to pay their debt, so they looked to bankruptcy to solve their problems.
The foreclosure and eviction moratorium
The extension of the CARES Act protected tenants who were living paycheck to paycheck from the foreclosure or eviction from their home or apartment arising from non-payment of rent.
Under the CARES Act, landlords could not evict a tenant if the property contained more than 5 units and the landlord had received a forbearance on the mortgage. Once the forbearance duration ended, the landlord had to give a 30-day notice of default to the tenants.
Now that the moratorium has been lifted, some consumers who face the threat of losing their home or residence have found sanctum in the bankruptcy court system.
Reduction in debt collection actions
From the onset of COVID-19, debt collectors in the country made significant changes to their debt collection strategies. Individual states put a temporary halt on debt collection in a few ways.
Some state authorities limited the seizure or garnishment of stimulus checks. Some banned garnishment altogether. And in others, the court systems were suspended, so no new court orders or writs could be issued. However, bear in mind that if there was an existing court order against you, it could still be enforced in those states.
Once debt collection agencies ramped up their collection efforts again, consumers who were unable to work out reasonable settlements of their debt were again looking to bankruptcy for their fresh start.
Find answers to some of the most common bankruptcy myths as we try to dispel misconceptions about bankruptcy.
What should I do if I think I need to file for bankruptcy?
Before filing for bankruptcy, you should consider that the process is a massive step in managing finances. It’s a procedure that will force you to organize your finances and ultimately relieve your financial stress.
However, bankruptcy stays on your credit for 7 years for a Chapter 13 and 10 years for a Chapter 7.
Your credit rating will likely decrease during this time, which can make it difficult to access financial help. If you think you need to file for bankruptcy, consider doing the following things first.
Get in touch with lenders
You should contact lenders if you face the risk of missing payments. Your lenders might provide you with better solutions during these times of hardship.
Your lender might allow you to delay or make a customized payment plan for your needs. Some lenders might also waive fees or interest. Getting in touch with your lenders may also help you avoid a negative rating on your credit report.
Consult with a financial professional
A professional financial consultation can help you solve many of your financial problems. It may seem like an unnecessary cost, but oftentimes, a one-hour meeting with a bankruptcy attorney can help you plan for your future and save you thousands of dollars.
Such financial professionals have the technical know-how and experience to help you stay organized. However, they need you to be transparent about your personal livelihood. They use such information to assess the risk that you face and to recommend suitable solutions for your needs.
You should be ready to discuss personal details such as your financial assets, income, and expenses so they can assess your current economic situation and offer a viable solution.
Looking for the best bankruptcy law firm in Birmingham?
The drop in bankruptcy filings during COVID-19 wasn’t because people suddenly became more financially secure. It was largely due to temporary relief measures that delayed the impact of debt.
Now that many of those protections have ended, more individuals and families are once again facing the reality of mounting financial pressure.
If you’re starting to feel that strain, taking action early can make a meaningful difference. Whether that means exploring alternatives or determining if bankruptcy is the right path, having the right guidance can help you avoid costly missteps and move forward with a clear plan.
At Nomberg Law Firm, Birmingham bankruptcy attorney Steve Altmann has more than 25 years of experience helping people in Alabama protect their assets while discharging their debts.
Learn how he can help you and your family become financially secure by scheduling afree consultation.
We are a Federal Debt Relief Agency. We help people file for bankruptcy relief under the U.S. Bankruptcy Code.