COVID-19 plunged the world into an economic and health crisis unlike any seen to date. According to long-held views by economists, the rates of businesses filing for bankruptcy is influenced by economic activity — or lack thereof. Over the last two years, a range of companies across a diverse number of industries, such as energy, commercial real estate, food service and restaurant, travel and leisure, communications, retail and more, have filed for bankruptcy. 

Economic Activity and its Influence on Bankruptcy Filings

According to data gathered regarding Chapter 7 and Chapter 11 bankruptcy filings and economic activity from 2013 through September 2021, a reduction in bankruptcy filings corresponded with the expansion of economic activity. This demonstrates the inverse relationship economists expect between economic activity and the number of bankruptcy filings. 

However, the statistics also support a surprising fact. In spite of the economic contraction seen in 2020, there was not an increase in bankruptcy filings that economists predicted based on the historic data linked the two occurrences. Instead, there was a significant decrease in the number of Chapter 7 filings. 

When it comes to Chapter 11 filings, there was an increase in bankruptcy filings. However, this was not the sharp jump that was expected given the economic activity at the time. 

COVID and Recent Bankruptcy Filings

When the data for 2020 and 2021 is compared to that of 2019, the previously mentioned pattern of bankruptcy and economic activity continues. Keeping in mind that business Chapter 7 filings are most often associated with small and medium-sized businesses, both business and non-business bankruptcy filings for Chapter 7 were fewer in 2020 than in 2019. During the first three quarters in 2021, the number of filings also did not rise to those experienced in 2019.

The story of Chapter 11 filings is a bit different from that of Chapter 7 bankruptcy filings. Compared to Chapter 11 filings in 2019, in 2020, there was a significant jump in the numbers. Surprisingly however, that trend saw a sharp reversal in 2021 with Chapter 11 filings being 28 percent lower than in 2019. It is interesting to note that businesses with an asset value of more than $50 million experienced a nearly 200 percent increase in bankruptcy filings in 2020. 

Factors Leading to Bankruptcy Filing Reduction

A surprising development for many economists was the fact that many households and small- to mid-sized businesses did not file for bankruptcy as frequently as they predicted. While it is difficult to pinpoint exactly why this might be, there are a few possible reasons including: 

• Relief Efforts: A range of policy responses were implemented in response to the COVID crisis. The Coronavirus Aid, Relief and Economic Security Act (CARES Act) included a moratorium on foreclosures, beefed up unemployment insurance initiatives, the Paycheck Protection Program (PPP) and other measures could have provided smaller businesses as well as households with the resources they needed to avoid bankruptcy. 

• Limited Access: Another possible factor could be that access to bankruptcy services was limited by measures implemented to keep COVID-19 at bay. Bankruptcy courts might have been busier due to staff shortages and limited hours. Bankruptcy counsel might also have been more difficult to meet with due to pandemic policies. 

• Bankruptcy Fees: Bankruptcy fees could hinder filing for households and small businesses — especially if they experienced limited liquid assets during COVID. A study that used data regarding tax rebates received from 2001 and 2008 showed that households that received a tax rebate were more likely to file for bankruptcy than those that did not receive one. 

• Wait and See Approach: Because most households must wait at least eight years in between Chapter 7 bankruptcy filings, many people — including those with small businesses — might have taken a wait and see approach. The uncertainty of the pandemic could have led them to wait to see how the economic crisis would play out before taking such a step. 

The COVID pandemic continues to provide uncertainty across the economy. If you are confused about bankruptcy and need professional assistance, Clark & Washington PC is here to help. Our skilled attorneys provide assistance and service throughout the Atlanta area. Learn more about how we can help you by contacting us today.