For the millions of Americans who’ve seen their finances upended by the pandemic, federal stimulus payments, enhanced unemployment benefits and the slew of moratoria placed on debts might have seemed like a godsend when they were first announced. But what happens when those programs expire?
For one, bankruptcy attorneys predict that consumer and small business bankruptcy filings are going to skyrocket, and they say the wave is likely coming before the end of 2021.
“There’s a backlog of evictions, foreclosures and collection cases that are all being put off because of the pandemic that is going to come to a head, I think later on this year, probably late summer or early fall,” said Stephen Swift, lead attorney at Swift Bankruptcy Law Firm in Colorado Springs. “I do think we’re going to be busy, but the last thing that we are today is busy.”
Despite a major drop in consumer spending and unemployment rates not seen since the Great Depression, the expectation that bankruptcies would, in turn, rise over the course of 2020 didn’t actually pan out, according to a study published in August by Harvard Business School.
Instead, filings overall dropped by 27 percent year-over-year between January and August of 2020, researchers found, driven largely by a steep decline in consumer and small business filings, which usually rise alongside the joblessness rate. That Chapter 11 bankruptcies (reserved for large corporations) rose by 35 percent year-over-year during the same period illustrates the severity of the downward pressure caused by the consumer and small business side of the equation.
In Swift’s office, Chapter 7 and 13 filings used in those cases have dipped even lower than the national average, down by more than 40 percent as of early this month, he said.
“We have tended to hold our own even when things are slowing down,” Swift said, “but it’s been so bad that I only filed two cases in the last 30 days, which is very unusual for me because that’s about 10 percent of what we normally do.”
In some cases, the economic devastation caused by COVID-19 has been so sudden and severe for many people, and has caused such rampant job losses, that some don’t even have the income or assets they might normally file a bankruptcy claim to protect, he said. The cost of filing alone can also be prohibitive, running to several thousand dollars in some cases.
“They don’t have the money to pay us,” he said. “They don’t have the income to protect. So everything is kind of on hold until this big logjam that is coming up has broken.”
Elizabeth German, lead bankruptcy and debt attorney at Robinson & Henry, also said COVID-19 financial relief programs enacted at the federal and state levels have caused many people to postpone foreclosures and evictions — and those may come all at once when those programs sunset.
“At first it was three months, then it was six, and now it’s nine months where you don’t have to pay your mortgage,” German said. “What they’re not very clear on to people is, do you have to pay that back all at once when your forbearance is done, or can you have any other options? And so they are, in my opinion, doing people a disservice because they’re saying, ‘Sure, yeah. Don’t pay your mortgage for nine months.’ But they don’t explain what has to happen at the end of the nine months.”
By the time the debt comes due, German said, it’s possible that a homeowner’s credit will have declined to such an extent and that their debt-to-income ratio will have become so unfavorable that an application for a loan modification is unlikely to be approved.
Many people have run short of options, but she said relying solely on the short-term reprieve of government assistance will, in many cases, only delay serious long-term financial consequences.
“Trying to find income in any fashion is a good idea,” she said. “Try to start saving where you can. If you’re going to go and look at options down the road, then having an income either to do that settlement or bankruptcy is going to be better than not having that. Now, again, that’s still a pipe dream for a lot of people due to unemployment and COVID, but we’re seeing small trends upward — like with the hotels opening and the bars opening back up — so hopefully that gets people back in and able to work.”
People looking to act must do so quickly.
Mortgage forbearance on federally backed mortgages and eviction moratoriums expire on June 30, following an extension by the Biden administration. New applications for the Pandemic Unemployment Assistance program will be unavailable after April 5.
Colorado received $383.3 million from Washington, D.C., late last year as part of the $908 billion Coronavirus Response and Relief Supplemental Appropriations Act to help people across the country who are still struggling to cover mortgage payments and rent.