The impact of COVID-19 is relevant in many areas of life. Once-thriving local businesses are now closing their doors. Our living rooms are the new classroom. And an already volatile economy is currently suffering its most significant blow since the Great Depression.
Anyone can predict a surge of bankruptcy filings is on the horizon. But our crystal ball does not seem to know precisely when. If the adage history repeats itself is correct, we can determine what the future holds based on the past.
What We Can Learn From Past Filing Data
From 2015 to 2019, the yearly average of chapter 7 filings was 477,000. This equates to an average of 40,000 filings per month, providing a benchmark for 2020 trends. In the first two months of 2020, consumer bankruptcy filings were almost identical to 2019. But going into March, we begin to see drastic differences in filings year-to-year.
Between March and April, filings plummeted almost 50% and were down 46% again in May, with just a slight increase in the two months following.
Figure 1
Is this the Great Depression of the 21st Century?
The unemployment rates have skyrocketed, from 4.4% in March to almost 15% in April (figure 2)—the highest it has been since the Great Depression. In April, we hit a high of 23 million people unemployed (see figure 3). That's more than triple the rate in March!
As of July, there were over 16 million people unemployed. This means that roughly 10 million people who, in normal circumstances, would be employed, are now unemployed.
Figure 2
Figure 3
What Can We Expect?
With the assistance of government financial support, a moratorium on evictions and foreclosures, and banks' willingness to defer payments, consumers have managed to stay afloat. But as the aid runs out, unemployment, business failures, and debt distress will drive a long-term increase in filings.
The bankruptcy experts foresee more consumers searching for relief from their debt in the upcoming months, creating the big surge we all know is coming.