Each year, only a fraction of the Americans who could benefit financially from bankruptcy actually seek relief, according to an Associated Press commentary. About 14 percent of U.S. households — or roughly 17 million — owe more than they own, according to Federal Reserve Bank of New York estimates. Many of these households could benefit from having their debts wiped out, but fewer than 1 percent of U.S. households actually file for bankruptcy each year.
Last year, there were 752,160 personal bankruptcy filings. Researchers refer to this gap as “missing bankruptcies” — the filings that could be happening, but aren’t. Now, there’s an additional set of missing bankruptcies: the cases people normally would have filed in recent months, but haven’t. Bankruptcy filings dropped dramatically in the second quarter of this year, to about 60 percent of the average for the previous five years. Courthouses were shuttered by pandemic closures, which made it harder for creditors to pursue foreclosures and wage garnishments. Those are two big drivers of consumer bankruptcy filings, says David Cox, a bankruptcy attorney in Lynchburg, Va., and co-author of ABI’s Consumer Bankruptcy: Fundamentals of Chapter 7 and Chapter 13 of the U.S. Bankruptcy Code. Borrowers have benefited from various forms of coronavirus relief, such as suspended payments on federal student loans, mortgage forbearance and expanded hardship options for loans and credit card accounts. The $600 weekly bump in unemployment checks, which expired in July, also kept many people afloat, Cox says. Lower jobless benefits, along with the reopening of courts and continued high unemployment, mean the lull in bankruptcy filings is likely temporary, says Jenny Doling, a bankruptcy attorney in Palm Desert, Calif., who served on the ABI Consumer Bankruptcy Commission’s Chapter 13 Advisory Committee. She worries that people will wait too long to file. Too often, people drain retirement funds or other assets that would be protected in bankruptcy to pay debts that will ultimately be erased, she says. Putting off bankruptcy also can make it harder to come up with the $1,500 needed to file a typical case.