The Great Bankruptcy Flood of 2021: A Surge or the Start of a Steady Stream?

Many bankruptcy practitioners are predicting that the COVID-19-blasted economy will bring in a tidal wave of bankruptcy filings in 2021. While 2020 saw a surge in Chapter 11 filings for larger companies in energy, retail, and consumer services, individual bankruptcies and total bankruptcy filings trailed the 2019 figures. While COVID-19 has caused some businesses and individuals to turn to bankruptcy in order to keep their creditors at bay, many others have delayed filing as they wait to see how deep the holes that they are in will continue to get. Many individuals and businesses have been able to take advantage of pandemic relief options made available through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) such as stimulus checks, pandemic unemployment benefits, as well as the ability to defer mortgage and student loan payments, and eviction moratoriums. Throughout 2020, we have repeatedly advised clients to hold on for as long as they can in light of the uncertainty regarding how long this pandemic will go on and to preserve exempt assets in the interim.

There are at least two schools of thought about what 2021 and future years hold in regard to the anticipated increase in bankruptcy filings. On one hand, some predict that there will be a bankruptcy surge in 2021 that will yield record level filings shortly after the end of the moratoriums on evictions and the forbearances on mortgages conclude. On the other hand, there is an equally significant group that predicts a moderate and gradual increase in bankruptcies over the next two to four years. Either way, there is little debate that the flood is coming. Those practicing bankruptcy have certainly seen sharp and short-term increases in filings in the past, notably the historical peak in bankruptcy filings in 2005 just prior to the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act. While it may seem possible that the COVID-wrought economy could bring about another peak that may match or exceed the 2005 annual total of nearly 2.1 million filings, most would agree that the current trends suggest that this “peak” is more likely to be a steady build and high, sustained plateau.

That said, it is predicted that the future increase will be notably different in one significant aspect – the client. Specifically, the clients are projected to be responsible people who had steady jobs and paid bills reliably until COVID-19 cast them into unemployment or reduced income. The pandemic and associated shutdowns have gone well beyond what most families plan for in savings and financial planning. As stimulus checks, unemployment assistance, student loan deference, moratoriums on evictions, and other temporary financial reliefs expire, the likelihood of increased Chapter 7 or Chapter 13 filings for individuals is expected to soar.

Small business owners are feeling the pressure as well. Restaurants and retailers closed for months by government mandates—and now only able to serve limited numbers of customers due to social distancing requirements thereby significantly reducing the business’ margins—have been especially hard hit. More and more small businesses will realize that they simply cannot carry on in this restrictive COVID world and they will have to close. If restrictions remain in place and people continue to limit their consumer spending, these businesses may not have an option and will eventually seek bankruptcy counsel. Those small businesses lucky enough to receive PPP loans may seek either traditional Chapter 11 or Subchapter V reorganizations after PPP loans expire and some businesses cannot fulfill the conditions needed to obtain loan forgiveness.

2020 was an unusual year for bankruptcy filings, which can be directly attributed to the effects of the pandemic and the federal and state governments’ stimulus response. As aid runs out, those holding off on bankruptcy decisions will soon start running out of options. Clients should be encouraged to meet with reputable bankruptcy counsel sooner rather than later so that they can plan properly for how to escape the hole created by this pandemic.

About the author

Nedda Ghandi, Esq. is an attorney with Ghandi Deeter Blackham Law Office. Nedda’s primary practice area involves bankruptcy for both individual and business debtors.