Personal Bankruptcies Down, Business Bankruptcies Filings Up

An Explanation of the Phenomenon Being Observed in the Bankruptcy Field

Since March 2020, the coronavirus pandemic has wreaked havoc on the United States, as well as the rest of the world. While being infected with COVID-19 has serious health implications, the economic consequences of quarantine and stay at home orders is a crisis in itself. During the last recession in 2008, bankruptcy filings went up 33%. Many expected to see similar increases in bankruptcy filings due to the coronavirus pandemic, but available data so far shows slightly different results. Business bankruptcy filings have gone up, but personal bankruptcy filings are actually lower this year than the same time last year.

A recent study by Brigham Young and Harvard University found that bankruptcy filings are down 27% as compared to the same time last year. However, another study conducted by Epiq found that commercial bankruptcy filings suddenly increased by 78% in September 2020, leading to an overall increase of 33 percent. Epiq reported that these businesses are mostly small, without access to significant funding to survive the pandemic. However, headlines have been plastered with major businesses filing bankruptcy, like JC Penney, J. Crew, 24 Hour Fitness, and Hertz Rental Cars.

While the discrepancy between personal and business bankruptcies may seem confusing at first, it actually makes sense when you understand how the different chapters of bankruptcy work.

Chapter 7 Bankruptcy in Mesa

Chapter 7 can be used by both personal filers and by businesses. Because it allows filers to liquidate most types of unsecured nonpriority debts, it has strict income, asset value, and time limits. Personal filers will have to surrender assets that aren’t protected by exemptions, and business filers will need to shut down the business permanently. Personal Chapter 7 bankruptcy filings are down 23% this year.

Debts are discharged from the date the petition was filed. The filer will be disqualified from filing Chapter 7 again for 8 years from that date. Therefore, for someone who plans to file Chapter 7 bankruptcy, it is best to wait until after the circumstances that aggravated the debt- e.g., unemployment- to end.

Millions of the Americans who lost their jobs due to the pandemic have yet to find new employment. While some of the benefits of the Coronavirus Aid, Relief, and Economic Security (CARES) Act have greatly assisted American families in surviving the pandemic, the current pandemic unemployment rate of $400 per week isn’t enough alone for many others. Families that are relying on credit cards and similar means to make ends meet should consider waiting until family members return to work so that all possible dischargeable debt can be included in the bankruptcy.

Income eligibility for Chapter 7 bankruptcy hinges on the filer’s average income over the last 6 months. Those who lose their job due to COVID-19 may be able to qualify for Chapter 7 after a few months of unemployment when they couldn’t before.

Chapter 13 Bankruptcy Filings in Mesa, Arizona

Chapter 13 bankruptcy is most often used by personal filers who don’t qualify for Chapter 7, although some do seek the specific protections Chapter 13 provides. Using the debtor’s income, expenses, and debts, a 3-5 year reorganization payment plan will be formulated. At the end of the payment plan, certain debts, like credit cards and medical bills, can be discharged even if they are unpaid. Back payments on leased assets like vehicles and houses can be spread out over the course of the payment plan while the property is protected from seizure by the Automatic Stay.

Chapter 13 filings are down 43% as compared to last year. There are two reasons (and probably many more) that Chapter 13 filings are currently down. One of these is that most states have eviction moratoriums in effect, which prevent residents from being ousted from their homes for nonpayment. While the rent or mortgage from the moratorium period will still be due when the moratorium expires, most people are protected from losing their home for failing to pay their rent or mortgage.

Another reason that now might not be a good time to file Chapter 13 is that payment plans are calculating using income averaged over the past 6 months. Those who lost their jobs at the onset of the pandemic may now have a reduced average monthly income due to prolonged unemployment. For those who lost their jobs later in the year, it may serve them well to wait a few more months to file to bring down their average income for the purpose of calculating monthly payments.

Chapter 11 Business Bankruptcy Filings in Mesa, Arizona

When you see a news article about a business or other organization filing bankruptcy, it’s most likely they used this chapter. In Chapter 11, a business will negotiate and restructure its debts with a committee of its top creditors. These creditors will also have authority over major business decisions, but the company can continue with ordinary business as usual. The company can continue operating during and after the bankruptcy, depending on which proposal of debt restructuring is accepted.

There have been more than 5,500 Chapter 11 bankruptcy filings in the United States so far this year. In 2019, the total number of Chapter 11 bankruptcy filings was 5,519. As filings increased by 78% in September and there are still a few months left in the year, it can only be expected that Chapter 11 filings will be far higher in 2020 than in previous years. Chapter 11 allows businesses not only to restructure their debts, but to come up with novel business plans while protected from creditors by bankruptcy.

While a business has the option to file Chapter 7 and shut down, businesses that opt for Chapter 11 business bankruptcies allow businesses a chance to return to a profitable state. Other household name companies to file during the pandemic include Neiman Marcus, Lucky Brand Denim, Men’s Wearhouse, Brooks Brothers, Gold’s Gym, Chuck E. Cheese, California Pizza Kitchen, GNC, and True Religion. Pier 1 Imports is another notable company to file Chapter 11, but has clearly stated its intentions to close all of its locations.