Americans were filing for bankruptcy much more in the first half of 2023 than they were at the same point last year, according to new numbers showing the increase in financial strain for some as pandemic protections fade away.
The rise in 2023 cases comes even before student loan payments restart in October after a three-year hiatus — a resumption that might stretch some budgets too thin. Last week, the Supreme Court blocked the Biden administration’s plans for student loan forgiveness.
Individuals and businesses filed more than 217,000 bankruptcy cases through June, said Epiq Bankruptcy, a legal data provider, and the American Bankruptcy Institute, an association for lawyers, judges and others working in the bankruptcy field.
The mid-2023 tally is a 17% increase from the approximate 185,000 cases filed by the same point in 2022, according to the numbers.
“The growth in filings is reflective of more families and businesses facing surging debt loads due to rising interest rates, inflation, and increased borrowing costs,” said American Bankruptcy Institute Executive Director Amy Quackenboss.
Consumer cases historically make up the brunt of bankruptcy cases and 2023 has been no exception. There were more than 205,000 newly-filed consumer bankruptcy cases through June, a 17% increase from the first half of 2022.
Bankruptcy is a way to get a fresh financial start for people who are struggling to repay their debts.
Filing for bankruptcy under Chapter 13 lets consumers pay back creditors through a court-approved installment plan, though the bankruptcy stays on a credit score for up to seven years. Chapter 7 bankruptcies liquidate assets, but stay on credit score for up to 10 years.
Meanwhile, Chapter 11 bankruptcy cases let business restructure their debts akin to the ways a Chapter 13 plan works for a consumer. There was a 68% increase in commercial Chapter 11 cases compared to the same point a year ago, according to the statistics released this week.
The number of bankruptcy cases had been sliding in the past three years. The question is whether 2023 is the year where bankruptcy cases start swinging higher again.
In 2020, there were nearly 545,000 new bankruptcy cases and in 2021 there were approximately 413,000 cases, according to the American Bankruptcy Institute. Last year, there was roughly 387,000 cases.
Dramatic financial events in a person’s life – like the imminent loss of a home through eviction or foreclosure – can make them turn to bankruptcy.
But during the pandemic, there was an array of government intervention and cash relief to keep households above water, like three rounds of federal stimulus checks and installments of the enhanced child tax credit payment. There were also federal eviction and foreclosure moratoriums, but they ended in 2021.
“Bankruptcy filings have been at historic lows for the past few years due to the COVID foreclosure and eviction moratoriums and the availability of [Paycheck Protection Program], [Economic Injury Disaster] loans and other financial assistance from the government,” said bankruptcy lawyer Richard Nemeth, president of the National Association of Consumer Bankruptcy Attorneys.
The Paycheck Protection Program and the Economic Injury Disaster loans were both for businesses.
“Now that the COVID crisis has ended, we believe that it is highly likely that bankruptcy filing rates will rise significantly,” Nemeth said. The Cleveland, Oh.-based attorney of Nemeth & Associates, has seen the upward in his own practice, he added.
To be sure, the job market has rebounded from the pandemic’s sharp, short drop three years ago. The next peek at the market comes with the June jobs report on Friday.
But four-decade high inflation rates in 2022 have worn away the cushion in consumer budgets and credit card debts are climbing. Americans amassed $986 billion in credit card debts through the first quarter of the year, according to the Federal Reserve Bank of New York. That’s a 17% increase from the collective credit card balance in the first quarter of 2022.
Some research suggests people spend around two or three years struggling to get their debts under control before they opt for bankruptcy as a last resort.
Student Loans and Bankruptcy
After a more than three year pause, student loan payments are going to resume in October. It will not happen with any loan forgiveness, after the Supreme Court voted the Biden administration didn’t have to authority by itself to blot out billions in federal student loans.
At this point, borrowers now have a “temporary on ramp” President Joe Biden said after the decision.
Payments are still owed and interest still builds, but the on ramp is a one-year grace period. Borrowers who miss payments will not be reported to credit bureaus, have their loans put in default or be referred to collections agencies. The period runs from October 2023 to September 2024.
Still, restarted payments will push bankruptcy cases higher, said Nemeth. After the Supreme Court decision, “discharge of student loans in bankruptcy for those in financial distress is one of the few remaining options,” he said.
Federal student loans can be discharged in bankruptcy, but the person seeking bankruptcy protection has to show “undue hardship.” Historically, it’s been difficult to show this hardship. Last November, the Justice Department issued guidance to U.S. Attorneys to revise their approach to these undue hardship claims on student loans.
When people want to discharge their federal student loans in a bankruptcy case, lawyers in U.S. Attorneys’ Offices have to recommend if the Bankruptcy Court judge should let any or all of the debts get wiped away.
The new steps “streamlined the process for evaluating need-based student loan discharges in bankruptcy which was overly burdensome in the past,” Nemeth said. “For those with demonstrable need, obtaining relief will be more attainable going forward.”