As more Americanslose all or part of their incomesand struggle with mounting debts, another crisis looms: a wave of personal bankruptcies.
Bankruptcy can discharge or erase many types of debts and stop foreclosures, repossessions and wage garnishments. Butour research showsthe bankruptcy system is difficult to navigate even in normal times,particularly for minorities, theelderlyand those inrural areas.
COVID-19 is exacerbating the existing challenges of accessing bankruptcy at a time when these vulnerable groups – who are bearing the brunt of both theeconomicandhealth impactof the coronavirus pandemic – may need its protections the most.
If Americans think about turning to bankruptcy for help, they will likely find a system that is ill-prepared for their arrival.
It’s a hard road
There are many benefits to filing bankruptcy.
For example, it can allow households toavoid home foreclosure, evictions andcar repossession. The“automatic stay”triggered at the start of the process immediately halts all debt collection efforts, garnishments and property seizures. And the process ends with a discharge of most unsecured debts, which sets people on a course to regain some financial stability.
We know from our empirical research, however, that filing for bankruptcy comes with costs. In aChapter 7 case, known as a liquidation when a debtor’s property is sold and distributed to creditors, households may be required tosurrender some of their assets. The post-bankruptcy path to financial stabilityis often bumpy.
In aChapter 13 reorganization case, households must commit to making monthly payments equal to their disposable income for three to five years. But the majority of people, unfortunately, areunable to keep up with their payments for that longand do not end up eliminating their debts.
Monetary costs can also be substantial.Attorney feesaverage$1,225 to $3,450. Court fees are over$300. And of course, there are alsoother downsides, such associal stigma,negative creditandlower future earnings.
Nonetheless, struggling Americans may find bankruptcy one of few viable options to address their worsening money problems, particularly as thepandemic shows no signs of endingsoon.
Yet, as a consequence ofnationwide shelter-in-place orders, consumer bankruptcy filings have declined significantly in recent weeks.
In the last 10 days of March, when states began issuing such orders, we found that Chapter 13 filings fell 45% compared with the last 10 days of March 2019, based on adocket search on Bloomberg Law. Filings in all of April – when most states were under lockdown – plunged 60%, while Chapter 7 filings were down 40%.
This suggests that there’spent-up demand for bankruptcy protection– in terms of what we’d normally expect – on top of the impact from the coronavirus recession.
The currentlimited physical access of many bankruptcy courtspresents additional problems, especially to already vulnerable groups. There is significant variation in how courts are handling the situation, but most require access to technology. This means thatethnic and racial minorities,seniorsandpeople living in rural areasface systemic barriers to filing because of their more limited access to transportation and technology.
Self-represented filers, who navigate bankruptcy alone to avoid the hefty attorneys’ fees, face additional challenges and make up approximately9% of bankruptcy cases. These filers typically havelower income and fewer assets– and thus are less able to afford thebenefits of having an attorney– and aremore likely to be black.
Insomedistricts, only attorneys can file electronically, so people handling the process themselves must mail in their petition or find some other way of getting it to the courts, such as via physical drop boxes.
But such methods still assume access to technology. A computer, the internet and a printer are needed to access and print the petition. Libraries and other institutions that traditionally provide technology access for those who do not have it are, for the most part,closed.
Some courtsare allowing initial email submission of the petition from those without attorneys, but petitioners are still required to follow up by sending original documents via the mail or drop boxes. Access to a computer, the internet and a printer remains necessary.
Finally many states require “wet signatures” on bankruptcy petitions. That is, people have to sign their names in ink, as opposed to using an electronic signature. To smooth filings while courts are physically closed, several states havewaived this requirementfor those using an attorney.
But even then, access issues still abound. People must first send their attorney the vast array of documents needed for filing – typically amounting to dozens of pages. Filers still need to be able to copy, scan and email documents. For those without computer access, they have to mail original documents, a somewhatrisky propositionwhen important papers could get delayed, stolen or lost.
A bad time to file
In other words, the middle of a pandemic is not the best time to file for bankruptcy.
And withoutmore aidto individualssoon, U.S. bankruptcy courts will likely face atsunami of filings, not only from average Americans butcompanies as well. This will clog up the system, which is whymany experts are calling on Congressto shore up bankruptcy courts with more judges and funding.
But a first priority should be shoring up individuals, for whom bankruptcy is seen as a last resort. If more aid isn’t forthcoming, the bankruptcy system may be too overwhelmed to handle even that.
Paige Marta Skiba, Economist, Professor of Law, Vanderbilt University; Dalié Jiménez, Professor of Law, University of California, Irvine; Michelle McKinnon Miller, Associate Professor of Economics, Loyola Marymount University; Pamela Foohey, Associate Professor of Law, Indiana University, and Sara Sternberg Greene, Professor of Law, Duke University