‘It’s going to explode.’ Bankruptcies could surge when coronavirus restrictions drop
Bankruptcies in Kentucky have dropped significantly during the coronavirus pandemic despite financial insecurity from job loss and business closures.
Kentucky has had 1,776 bankruptcy filings, both business and non-business, since the state’s first case was confirmed on March 6, according to court records. That’s a 38 percent decrease in filings from the same time period in 2019, court records show.
But just because filings are down doesn’t mean Kentucky residents haven’t had trouble paying bills during the pandemic.
John Simms, an attorney at Atkinson Simms and Kermode in Lexington, saw the impact of business shutdowns early on.
“In the first couple weeks of the shutdown, I was getting a lot of calls,” he said. “... The kind of calls we were seeing were like hairdressers, restaurants, you know, small businesses. They were calling and saying, ‘what will our options be?’”
The calls have since slowed down, Simms said. Many people dealing with financial struggles will likely be able to get through them in the short-term with financial relief from the government, he said.
The majority of Americans are set to receive a $1,200 check from the federal government as part of the CARES Act, and those eligible for unemployment benefits in Kentucky can receive up to $1,152 weekly in temporary relief after an extra $600 per week was tacked on by the government.
But it’s what comes after the stimulus payments that has Simms concerned.
Kentucky bankruptcies could increase quickly
“Everything that I get day-in and day-out from people in the industry — it’s going to explode,” he said. “We’re going to see an insane amount of bankruptcies, unfortunately.”
When businesses begin to reopen, Simms said he doesn’t think employee pay and business profits will return to normal right away.
“I think the ramifications will be that everyone’s going to make a little bit less,” Simms said. “I don’t think we’re going to open the gate and every server is going to make what they were making before.”
He said that likely will lead to an increase in bankruptcy filings.
Mortgage relief programs ultimately may increase bankruptcies as well, he said. Federal, state and local governments have made efforts to allow people with home loans to delay payments without penalty, but some consumers may not realize that they will eventually have to make those payments, Simms said.
“COVID-19 kind of brought to fruition a lot of problems that were in the economy anyway,” Simms said.
Consumer debt topped $14 trillion at the end of 2019, according to the New York Federal Reserve, which eclipsed the previous national peak of $12.68 trillion (reached in 2008) by $1.5 trillion. Debt delinquency has also risen steadily, according to the New York Fed.
Filing isn’t what’s best for everyone
Some of the increase in bankruptcy inquiries comes from people who were struggling financially before the pandemic, said Tom Bunch, an attorney at Bunch & Brock Attorneys at Law in Lexington..
“Maybe they were leveraged with some debts before,” he said. “And now they’re not able to pay their debts, and what you’re finding is more people looking for ‘what can I do?’”
Bunch doesn’t have an answer that applies to everyone. An analysis is crucial to determine next steps. Some people can wait it out. Others can’t.
“Maybe they go back to work and they have a good job and they’re able to deal with it,” Bunch said. “... There’s more people asking for advice. And that advice is not universal.”
Bunch said he cannot definitively predict how the pandemic will affect personal or business finances in the long run.
“We’re seeing a lot of businesses get hurt, but we don’t know what the recovery will look like,” he said.
But why aren’t bankruptcies increasing now?
There are multiple reasons why filings are down despite an increase in inquiries, according to Joan Grefer, a bankruptcy attorney with Davis & Haymond in Richmond.
People out of work and out of business may not have enough money to file and go through the bankruptcy process now, Grefer said. Filing the most common type of bankruptcy can cost $1,200 to $1,800.
Stimulus checks and unemployment benefits may help get people through the pandemic without needing bankruptcy, but those benefits may also have to go toward groceries and other necessities instead of bankruptcy costs.
In addition, people don’t really feel an obligation to pay their debts right now, Grefer said. Civil lawsuits are “lingering” during the pandemic with court hearings delayed.
“They know not a lot is really going to happen to them if they don’t pay a credit card bill or don’t make a mortgage payment,” Grefer said.
And the uncertainty of how long the pandemic may last also could contribute to people hesitating to file for bankruptcy. They may need to be able to add to their debt while they’re out of work, and filing would prevent that.
“If you don’t know when this crisis is going to resolve, and you need the ability to live off credit cards, you don’t want to file yet,” she said.
Grefer also said people may not be aware that law firms like hers are still finding ways to meet with clients over the phone or via video call, and bankruptcy cases are still proceeding.
“Maybe we’re doing it in jeans and T-shirts since we’re not seeing clients in person, but we’re still here.”
This story was originally published April 28, 2020 at 2:47 PM.