America's bankruptcy courts are yet to see a surge in filings despite the mass job losses amid what is predicted to be a deep and punishing recession, and many are even reporting a drop in cases, though one clerk likens it to the drawback of water before a tsunami.
Newsweek contacted a dozen clerks of some of the busiest bankruptcy courts across the country, from New York to California, Illinois to Texas and Florida. Most are seeing a fall in cases compared to the same period a year before, but they are awaiting a coronavirus-related spike.
"One of my colleagues described the bankruptcy filing situation as a tsunami. We are in the phase when the water retracts before the big wave hits," Barry Lander, clerk of the U.S. Bankruptcy Court for the Southern District of California, told Newsweek.
Lander said the delay of tax season to the summer and the postponement of evictions and foreclosures in many states could explain the current decline in bankruptcy cases. He also cited the increase in the amount of unemployment benefit and the stimulus checks.
"The question on everyone's mind is what happens when we get to the 'new normal?' Do the eviction and foreclosures go away? Does everyone return to work as before? Do all the small businesses and even major retailers survive? The likely answer is no," Lander told Newsweek, adding that the wave of bankruptcy filing is likely to hit later this year and into next.
"That doesn't mean there won't be filings before then, but I think people will wait until they have no other option and they have a complete picture of how much in trouble they are in financially. You don't want to file too early," he said.
"My guess is any filings we are seeing now are people that were on the edge of filing before the pandemic. The after-effects are still down the road. There were already some warning signs in the economy before COVID-19 such as auto loans defaults were up, for example."
In the Northern District of Illinois, bankruptcy cases are down by about 2,000 from this point last year, said Jeff Allsteadt, clerk of the local court. "We are expecting a spike in the caseload but it has not happened yet," Allsteadt told Newsweek.
Kathy Campbell, clerk of the U.S. Bankruptcy Court for the Central District of California, said overall filings in her area for the week ending April 17 were down 58.6 percent on the same period in 2019.
"Although our filings have significantly declined in the last few weeks, our local attorneys have indicated that clients are all waiting to see what effect the stimulus will have and how long they can hold out without filing," Campbell told Newsweek. "We certainly expect more filings in the days ahead."
Rob Colwell, clerk of the U.S. Bankruptcy Court for the Northern District of Texas, said filings are down by between 35-40 percent in April compared to a year ago.
Colwell attributes this drop to the "current pause in foreclosure and eviction activity, due to federal orders allowing for forbearance on certain home mortgage loans and an order by the Supreme Court of Texas, halting eviction activities during the month of April."
"We have seen an uptick starting in oil and gas cases, and I would expect more of them if the depressed price of oil continues for much longer," Colwell added.
He expects to see an increase in filings in another month or two "as creditors start up collection activities again."
Jason McDonald, clerk of the U.S. Bankruptcy Court for the Eastern District of Texas, said filings were down annually by around 20-30 percent and "across the board."
"For context, our case filings tend to fluctuate up and down from month to month throughout the year. So it could just be a point in time when our filings would be down anyway," McDonald told Newsweek.
"Or, other factors could be contributing to the decrease at the moment. For example, stay at home restrictions in place, or relief provided by the CARES Act. It is too early to tell what factors could be contributing to the decrease in our court at the moment, and it may only be temporary. I do anticipate an overall increase in bankruptcy filings in the coming months due to the negative economic impact of COVID-19," said McDonald.
The American Bankruptcy Institute (ABI) represents thousands of bankruptcy and insolvency professionals working across the U.S.
Amy Quackenboss, the institute's executive director, said its members "have told us they are quite busy," which means "more filings down the road."
Quackenboss said there will be two waves when Chapter 11 filings—used primarily by companies to restructure their debts—start to rise significantly.
"The first wave of filings will involve companies that were already in financial distress before the COVID-19 crisis. The second wave will likely envelop companies that were in decent shape before the crisis due to cash-flow being shut off during the pandemic," she told Newsweek.
"Consumer filings to this point have actually been down compared to a year ago, but skyrocketing unemployment and continued debt obligations are harbingers of filings by households. [[The surge in consumer cases is likely a little further off than the business case increase."
She praised the efforts by Congress and the Trump Administration to support consumers and businesses through cheap loans, grants, the economic impact payment, higher unemployment benefit, and other emergency stimulus measures.
For those whose financial challenges continue to grow, and who struggle to carry on despite the government stimulus, "bankruptcy offers a financial safe harbor from the economic storm," Quackenboss said.
She is unsure of when exactly things will take a turn for the worse and just how bad the bankruptcy situation will get.
"The uncertainties surrounding the virus itself, government economic stabilization efforts and when the economy may reopen make it difficult to provide an outlook on how many bankruptcy filings will result from the crisis," she said.
Lander of California's southern district noted the doubling in bankruptcy filings over a two year period during the Great Recession. "I think we are looking at a similar scenario," he said.
Uncommon Knowledge
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Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
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