The Total Number of Bankruptcy Filings Decreased in 2020, but an Increase is Likely in 2021

The coronavirus (COVID-19) pandemic caused the U.S. economy to fall into a recession last spring due to lockdowns and other social distancing measures. It was predicted at the time that this would lead to an increase in bankruptcy filings. However, due to Congress passing the CARES Act in March 2020 and the reopening of businesses, the economy began to rebound between July and September. As a result, many workers and small business were able to weather the storm and avoid bankruptcy.

The total number of personal and business bankruptcy filings fell 21.1 % for the 12-month period ending Sept. 30, 2020, according to statistics released by the Administrative Office of the U.S. Courts. The total number of bankruptcies decreased from 776,674 in the year ending in September 2019 to 612,561 in the year ending in September 2020. The total decrease in bankruptcy filings have largely been attributed to a decrease in personal bankruptcy filings.

The total number of bankruptcy filings have decreased in 2020

But it should be noted that the number of Chapter 11 Business Reorganizations increased by 12.3% in the 12 month period. The increase in Chapter 11 filings could have a domino effect on personal bankruptcy filings into 2021, as companies continue to reorganize their businesses and lay-off employees. In addition, the U.S. is starting to see a surge in COVID-19 cases and threats of another lockdown. This coupled with the failure of Congress to pass another coronavirus relief package to help millions of struggling workers and small businesses, has many economist predicting a double dip recession. Michael Feroli, the top economist for the largest bank in the U.S., JPMorgan Chase, said that “the recent coronavirus surge and renewed restrictions to stop the spread would drive up layoffs and shrink economic activity in the first three months of 2021” . This may lead to an increase in bankruptcy filings in 2021 as the economic effects from the pandemic continue to take its toll into next year.

The CARES Act provided businesses with several relief options, such as Paycheck Protection, Economic Injury Disaster, and Express Bridge loans. Unemployment benefits were increased by $600.00 and moratoriums on evictions and foreclosures allowed many people to delay filing bankruptcy. Many of these relief programs have or will be expiring at the end of 2020. Without additional Government assistance in 2021, “[i]t is almost certain that many more [people] will turn to bankruptcy as the only mechanism to overcome COVID-19’s economic fallout” . Even with a vaccine pending FDA approval, we are not out of the wood yet.

Lastly, we should not forget the lessons of the Great Recession.

The Great Recession that began in 2007 taught us that bankruptcy filings tend to increase gradually after an economic downturn begins. During the Great Recession new bankruptcy filings increased until they reached a peak in 2010. Bankruptcy filings are down for 2020, but as we head into 2021, we may not have seen the full economic fallout from COVID-19.

The Bankruptcy Code can be hard to navigate. If you need assistance understanding how to safely proceed in Bankruptcy Court or out of court workouts, contact the experienced litigation attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.

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[1] “Bankruptcy Filings Fall Sharply for Second Straight Quarter.” U.S. Courts, 26 Oct. 2020, https://www.uscourts.gov/news/2020/10/29/bankruptcy-filings-fall-sharply-second-straight-quarter.

[2] Gandel, Stephen. “Economists Fear a ‘Double Dip’ Recession Is Coming Soon.” CBS News, CBS Interactive, 26 Nov. 2020, http://www.cbsnews.com/news/recession-double-dip-2021-economist-fears/.

[3] Hall, Mark and Hertz, Michael. “What’s Disrupting Bankruptcy Trends Predicted in the Pandemic?” Bloomberg Law, 30 Oct. 2020, https://news.bloomberglaw.com/business-and-practice/whats-disrupting-bankruptcy-trends-predicted-in-the-pandemic.

[4] “Bankruptcy Filings Fall Sharply for Second Straight Quarter.” U.S. Courts, 26 Oct. 2020, https://www.uscourts.gov/news/2020/10/29/bankruptcy-filings-fall-sharply-second-straight-quarter.