Before the bankruptcy storm

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Here’s a little-noticed casualty of the coronavirus pandemic: bankruptcy filings. After the spread of the virus triggered stay-at-home orders, filings in April and May dropped suddenly and sharply. 

While such a plunge likely would have been seen as reason to celebrate in pre-COVID times, it now could signal calm before a storm of filings in late summer or fall.

After staying virtually flat in January and February, the number of total new filings in the nine-county Rochester Division of the federal Western District of New York began to recede in March. It dropped abruptly in April and continued to fall, albeit at a slower pace, in May, figures compiled by the district’s Bankruptcy Court show.  

The Rochester Division includes Monroe, Livingston, Ontario, Wayne, Seneca, Yates, Schuyler, Steuben and Chemung counties.

In March, the 116 new bankruptcies filed in the region fell slightly more than 3.3 percent from the 120 cases filed in the same month last year. A month later, the region’s 55 new bankruptcy filings showed a 60 percent plunge, falling from 139 new filings in April 2019. The slide eased somewhat in May when the area’s 67 new filings were 46 percent less than the 124 cases filed in May 2019, but still showed a significant drop.

The drop in bankruptcy filings comes as area unemployment numbers have soared to heights unseen since the 1930s. As social distancing took hold and businesses including retail outlets, restaurants and movie theaters closed, the area’s unemployment rate skyrocketed to 15 percent or higher. Slightly better numbers in May were still high.

The state Department of Labor defines the Rochester area similarly but not identically to the federal courts, counting the Rochester region as nine counties: Monroe, Ontario, Orleans, Wayne, Livingston, Seneca, Genesee, Wyoming and Yates.  

Local unemployment and bankruptcy numbers mirror national trends. 

According to the American Bankruptcy Institute, a Washington, D.C.-based nonprofit formed to advise Congress, U.S. bankruptcy filings registered a precipitous drop in April, declining 46 percent below the same month last year. Consumer and many commercial Chapter 7 filings for liquidation fell while Chapter 11 filings increased as many hard-hit retail, restaurant and hospitality chains sought court protection in hopes of restructuring debt. Total U.S. filings fell 42 percent in May, while Chapter 11 filings rose 48 percent. 

According to the federal Bureau of Labor Statistics, the U.S. unemployment rate hit double digits in April and May, rising from 4.4 percent in April 2019 to 14.7 percent this April and 13.3 percent in May.   

While letting the official numbers stand, BLS added a footnote explaining that due to a misclassification error, the April and May 2020 unemployment rates in fact were three points higher than reported in each month and that it was working to correct the problem. 

A disparity between sharply rising unemployment and steeply plunging bankruptcy filings is easily explained, bankruptcy attorney Douglas Lustig of Dibble & Miller P.C. says. 

Enhanced unemployment benefits, onetime $1,200 stimulus checks issued to most Americans and Coronavirus Aid, Relief and Economic Security Act payments to businesses have kept most who otherwise would have filed bankruptcy papers from doing so, says Lustig, who in addition to his practice serves as a Chapter 7 trustee.

While federal stimulus funds are helping to keep many afloat, he adds, mortgage foreclosures and evictions—events that many seek to stave off with bankruptcy filings—are temporarily on hold in New York.

Enhanced unemployment benefits end in July. House Democrats have called for new stimulus aid for workers and businesses, but Senate Republicans show no appetite for extending the enhanced unemployment benefit program and seem to see no urgent need for additional federal stimulus payments.

The GOP-controlled Senate would delay starting talks on additional stimulus numbers for at least a month, Senate Majority Leader Mitch McConnell, R-Ky., told National Public Radio in late May.

“I think you can certainly assume we will not be paying people a bonus for staying home in another bill,” McConnell said.

In New York, Gov. Andrew Cuomo has extended the state’s moratorium on evictions and foreclosures, ordering the temporary eviction and foreclosure bans initially scheduled to end June 20 extended to Aug. 20. There could be another extension, but banks and landlords are not likely to be able to carry delinquent renters and mortgage holders indefinitely. 

States including New York are reopening and restarting economies that were forced to a virtual dead halt as the pandemic first spread. But if many people for months to come continue to proceed with caution, cutting back on excursions to malls and other shopping trips, thinking twice about dining out and choosing Netflix over movies and live entertainment, the pace of recovery could be modest. It would keep unemployment high, leaving some businesses to face tough choices.

While the pace of bankruptcy filings has slowed to a crawl for now, Lustig says, he is fielding plenty of inquiries from consumers and businesses wanting to know what their options might be if their debt becomes overwhelming, a fate that could befall many when stimulus dollars dry up. 

“The extraordinary measures taken by Congress and the administration to assist individuals and businesses weather the initial economic shock caused by the pandemic have likely staved off bankruptcy filings to date. As financial challenges continue to escalate amid this crisis, bankruptcy is sure to offer a financial safe harbor from the economic storm,” echoes Amy Quackenboss, executive director of American Bankruptcy Institute.

Says Lustig: “When all those things end, and they will end, people will say to themselves, ‘I’ve got things to deal with.’”

Will Astor is Rochester Beacon senior writer.  All coronavirus articles are collected here.

One thought on “Before the bankruptcy storm

  1. The drying up of stimulus payments, the end of additional unemployment benefits, fee waivers, and the end of financial hardship offerings such as mortgage forbearance and eviction moratoriums must be a point of urgency for all financial institutions in the community. The alarm is being sounded around “What happens when the dust settles?” and, as your article highlights, the potential picture does not look good. More and more news outlets are raising awareness of this issue, but action must be taken beyond an expectation for additional government assistance.

    Financial institutions are in a position to get ahead of this coming storm as much as possible. We have access to a trove of customer data that when analyzed properly can help identify individuals and businesses that may experience issues when resources to hold off delinquencies and bankruptcies dry up.

    At ESL, we are investing significant time and resources (personnel and financial) to get ahead of these issues as much as possible. But we are not the only institution. Community financial institutions must look into these issues and develop appropriate responses and solutions to support our customers in these dire times of need. We are ready to extend 180-day mortgage forbearances and 90-day loan deferments for those in need, we continue to prevent negative impact to credit reports for those utilizing these offerings and we are relaxing underwriting criteria in an effort to ensure those who need access to funds can receive them. Unfortunately, no financial institution or developed solutions will be a cure-all. But if enough of us act and act fast, we can get ahead of the coming storm as much as possible.

    Richard Pulvino
    Manager, Corporate Communications
    ESL Federal Credit Union

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