Delinquencies and bankruptcies could multiply thanks to inflation
October 8 – The COVID-19 pandemic has given many people in the United States an unexpected financial boost, but with the economy potentially facing a recession, households and businesses could face difficult months and years coming. And after years of encouraging downtrends, that could mean US bankruptcies will once again be front and center.
The impact of the pandemic on consumer debt has been a pleasant economic surprise. Amid government stimulus payments and forbearance policies, increased savings during COVID shutdowns, and a tight job market with opportunities for wage growth, Americans have made great strides in repayment of debt over the past two years. But more recently, with inflation eating away at budgets, lenders raising interest rates and some industries suffering major layoffs, households are starting to feel increased financial pressures that could make it harder to pay their debts.
While economic trends during the pandemic have unquestionably helped a number of indebted people and businesses, bankruptcies were already declining steadily amid the recovery from the Great Recession. In 2009, business bankruptcies peaked at over 60,000, while in 2010 non-commercial bankruptcies reached a recession-era high of 1.5 million. In 2019, business bankruptcies had fallen by almost two-thirds to 22,780, and non-commercial bankruptcies by around half to 752,160. Both figures fell further in 2020 and 2021 following the pandemic.
Similar patterns occurred with household debt delinquency – defined as having payments overdue for more than 30 days. Almost all major forms of household debt rose during the Great Recession, fell during the recovery, and fell further from 2020 onwards. The exception is student loan arrears, which remained fairly stable post-recession but dropped due to COVID when the federal government introduced loan forbearance policies which remained in place for over two years.
But despite encouraging trends over the past decade, data from early 2021 suggests the economy may have reached an inflection point. Default rates remain at historically low levels, but started to rise again in the first quarter of 2022 for all forms of household debt except student loans. As the impact of inflation and rising interest rates increases, defaults and bankruptcies could become more frequent.
If bankruptcies increase again, the largest share will likely come from Chapter 7 liquidation, which is the most common form for commercial and non-commercial bankruptcies. Chapter 7 involves the sale of certain property or assets to generate cash to pay creditors. Chapter 13 bankruptcy, which involves the creation of debt repayment plans, is the second most common form for non-business debt, while Chapter 11 reorganization is most often used by large corporations.
Bankruptcies in the United States are also unevenly distributed geographically. Many of the places currently struggling the most with debt are located in more economically struggling parts of the country. Southern states account for six of the 10 states with the most bankruptcies, and they’re joined at the top of the list by a number of Rust Belt locations like Indiana and Ohio.
Missouri ranks 15th with 1,590 bankruptcies per million residents in 2021, including 24 business bankruptcies per million residents.
As the pandemic took hold, the effect it was going to have on bankruptcies was a concern that was being voiced both nationally and statewide, but it was thought not to be. was not going to happen in an instant.
“Some of these things take a little while to happen,” attorney Noah Briles said. “People don’t immediately think about filing for bankruptcy. I think that will eventually catch up with a lot of these people who haven’t worked and are behind on mortgages and other payments.”
The data used in this analysis comes from the US Courts Administrative Office, the US Census Bureau and Experian. To determine the states with the most bankruptcies in 2021, Smartest Dollar researchers calculated the number of bankruptcies per million residents.
News-Press NOW reporter Andrew Gaug contributed
to this report.
Andrew Gaug can be contacted at [email protected]
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