Analysis: Bankruptcy Filings Have Fallen in 2021, but Post-COVID ‘Shadow Debt’ May Spell Trouble

Analysis: Bankruptcy Filings Have Fallen in 2021, but Post-COVID ‘Shadow Debt’ May Spell Trouble

June 17, 2021

ABI Bankruptcy Brief

Analysis: Bankruptcy Filings Have Fallen in 2021, but Post-COVID ‘Shadow Debt’ May Spell Trouble

When the pandemic slammed into America’s economy last spring, some observers said it was just a matter of time before consumers turned to bankruptcy to free themselves of debt. But the surge never came, at least not in 2020. In reality, the total tally of bankruptcy cases dropped 30% from a year earlier, reported. The trend has continued so far this year. The nearly 181,000 bankruptcy cases filed through May 2021 is 29% lower than at the same point last year, according to statistics from Epiq compiled for the American Bankruptcy Institute. Now, a new study suggests the wait will continue — and possibly at a great cost to the people who are facing climbing debt loads. It can take people a while to get to the point of filing for bankruptcy, with people waiting an average of 22 months after their first 90-day past-due notice, according to Brigham Young University and MIT Sloan School of Management researchers. The new findings put a price tag on this wait. Borrowers rack up $4,000 in unsecured debt on average for every month they delay filing, researchers said. “Shadow debt” can also rise an average $7,200 for every month of filing delay, the study said. Overall, people owe $240,000 on average by the time they file for bankruptcy, the latest research concluded. Researchers combed through more than 550,000 consumer bankruptcy cases filed between 2001 and 2018 when writing the paper, which was distributed this week by the National Bureau of Economic Research.​​​

Weekly Jobless Claims Rise for First Time Since April

New weekly applications for unemployment insurance rose last week for the first time since April, according to data released today by the Labor Department, The Hill reported. In the week ending June 12, seasonally adjusted initial jobless claims totaled 412,000, rising by 37,000 from the previous week’s revised level of 375,000. Claims had fallen in every consecutive week since the week ending May 1, setting a series of new post-lockdown record lows. The number of new applications for Pandemic Unemployment Assistance also jumped by 46,722 to a total of 118,025 last week. The program, which is set to expire in September, extended jobless aid to gig workers, contractors and others who don’t qualify for traditional unemployment insurance. Overall, more than 14 million Americans were on some form of jobless aid during the week ending May 29, down from more than 30 million during the same time in 2020.​​​

The U.S. Averted One Housing Crisis, but Another Is Waiting in the Wings

The U.S. averted the most dire predictions about what the pandemic would do to the housing market. An eviction wave never materialized. The share of people behind on mortgages, after falling steadily for months, recently hit its pre-pandemic level. But a comprehensive report on housing conditions over the past year makes clear that while one crisis is passing, another is growing much worse, the New York Times reported. Like the broader economy, the housing market is split on divergent tracks, according to the annual State of the Nation’s Housing Report released on Wednesday by Harvard’s Joint Center for Housing Studies. While one group of households is rushing to buy homes with savings built during the pandemic, another is being locked out of ownership as prices march upward — and those who bore the brunt of pandemic job losses remain saddled with debt and in danger of losing their homes. For the past year, lower-income tenants have relied heavily on government support to pay their monthly bills. These measures have helped — about a third of renters used unemployment or stimulus payments to pay rent at some point during the pandemic — but the majority of renters still had to borrow or draw on savings to cover bills, leaving them less able to weather future emergencies, much less save for personal investments or a down payment for a home. The result is that even with a patchwork of federal, state and local eviction moratoriums, and some $5 trillion in federal relief that included expanded unemployment benefits and tens of billions in housing assistance, roughly 7 million tenants were behind on rent earlier this year. With savings tapped out and unemployment benefits set to lapse, the financial damage to low-income households remains severe enough that they will need more support if they’re to recover with the broader economy, the Harvard report said. For all of its shortcomings, the C.D.C. moratorium helped hold off a wave of evictions. And it became a valuable tool after Congress passed more than $40 billion in rental assistance, by buying tenants and their lawyers additional time as they waited for the federal government to review their applications. But the moratorium, which expires on June 30, was never much more than a stopgap that has done nothing to address a worsening nationwide housing affordability crisis caused by gentrification, the wealth gap and a chronic shortage of housing for the working class and poor. Even before the pandemic, one in four rental households was paying more than half its pretax income on rent, while homelessness was on the rise. Since then, more than half of renter households lost income, and 17 percent were behind on rent earlier this year, according to the Harvard report.​​​

Mortgage Companies Are Making Money Off of Forbearance Plans

When homeowners paused mortgage payments early in the COVID-19 pandemic, their mortgage companies found a way to make a buck by ramping up their purchases of government-backed mortgages in forbearance, then selling these loans back to investors at a profit, the Wall Street Journal reported. The trade is made possible by a policy meant to shrink the government’s own burden for dealing with mortgages where the homeowner isn’t paying. The so-called early buyout trade, an arcane but lucrative part of the mortgage business, is being employed by many mortgage companies, including the three biggest: Rocket Cos., PennyMac Financial Services Inc. and Wells Fargo & Co. That has added to what was already a banner stretch for mortgage-making, fueled over the past year by refinancings and pandemic-inspired moves to the suburbs. About 840,000 FHA and VA loans were in forbearance this month, or 6.9% of that market, according to Black Knight Inc. Over the 12 months through May, mortgage companies bought some $140 billion of Ginnie Mae loans where homeowners were in forbearance or otherwise not paying, according to a JPMorgan Chase & Co. analysis of Ginnie Mae data. Roughly $94 billion more is eligible. Now that some of these loans are performing again, $7.8 billion of them were repackaged into bonds in May alone, according to the JPMorgan analysis. (Subscription required.)​​​

COVID-19 Rent Breaks for Retailers Are Becoming the New Norm

During the worst of the pandemic, many landlords offered deals where ailing retailers paid a percentage of their monthly sales in rent — rather than a fixed amount — to help them survive. Now, this once temporary way of charging tenants looks poised to outlast COVID-19, the Wall Street Journal reported. More shopping-center owners are signing new leases where rent is tied directly to a portion of sales, at least for a period. These percentage-rent leases are especially attractive to newer retailers, offering some flexibility so that they aren’t saddled with large losses as they are starting out. While most landlords tend to prefer the reliability of a fixed monthly rent payment, the wider use of percentage leases reflects how much retail has become a renters’ market. Many retail businesses have struggled with competition from e-commerce, then took another blow when they faced pandemic-related lockdowns. Some didn’t survive, leaving landlords with excess space and compelling shopping-center owners to offer generous terms just to fill it. The growing use of percentage leases is the latest instance where agreements or behavior that was once considered a temporary response to the pandemic looks more long term, or even a permanent fixture. For example, more companies are allowing employees to work from home, and food delivery is continuing to boom even as restaurants resume something closer to full service. (Subscription required.)​​​

Waking from Bankruptcy Shock, Stockton Comes Back to Life

When Stockton, Calif., filed for bankruptcy in 2012, it was the largest municipality in the U.S. to be forced into this corner. A judge approved the city’s plan to exit bankruptcy in February 2015, and by 2016, Truth in Accounting had ranked Stockton second in its annual survey of fiscal solvency of the nation’s most heavily populated cities, according to Governing magazine. The city is still in the top five in the 2021 survey, with a surplus equivalent to $3,000 per citizen after all its bills are paid. In 2013, Detroit replaced Stockton as the largest city to seek bankruptcy protection, emerging in 2014. But it has not managed a similar resurgence. Motor City currently has a “taxpayer burden” of $6,100 — the sum each citizen would have to pay to bring its bills current. Stockton deserves high praise for the hard decisions and sacrifices that made its recovery possible, says its new city manager, Harry Black, but it’s time for the “muscle memory” that remains from austerity measures to be replaced by a spirit of growth. “The bankruptcy scared the city straight, which is what you want it to do, but not at the expense of growth and innovation,” says Black. “Now we’ve got to focus on catching up to the 21st century.” High-level goals may take time to achieve. The StocktonStat portal, scheduled for launch on June 30, will include data on the number of potholes and streetlights repaired, or square feet of graffiti removed, says Katie Regan of Stockton’s Office of Performance and Data Analytics. “The stat process, and this shared data, are part of a continuous conversation and relentless follow-up toward our performance targets.”​​​

Amid Pandemic Shocks to the Supply Chain, What Does the Future Hold for the Auto Industry? Scott Wolfson Provides Perspectives on the Latest Episode of ABI’s Industry Viewpoints

Scott A. Wolfson of Wolfson Bolton PLLC (Troy, Mich.) talks with ABI Editor-at-Large Bill Rochelle to provide key insights on the latest episode of ABI's #IndustryViewpoints. Watch now!

ABI's "Industry Viewpoints" is a video series released periodically on social media (Facebook, Twitter, LinkedIn and YouTube) featuring bankruptcy professionals providing their perspectives on the current state and future of an industry.

Previous guests include:

- Laura Davis Jones of Pachulski Stang Ziehl & Jones (Wilmington, Del.) providing perspectives on the future of retail

- Deborah Williamson of Dykema Gossett PLLC (San Antonio) discussing what is next for oil and gas

- Jim Shea of Shea Larsen PC (Las Vegas) providing an outlook on the hospitality and tourism sectors.

- Jim Tussing of Norton Rose Fulbright US LLP (New York) talking about the future of aircraft leasing.

Be sure to subscribe to the ABI YouTube channel or follow ABI on social media (, or to watch upcoming episodes, including the future of the supply chain!

Notice Regarding the UST Program’s New Chapter 11 Periodic Reports Effective on Monday

On Dec. 21, 2020, the U.S. Trustee Program (USTP) promulgated a final rule, “Procedures for Completing Uniform Periodic Reports in Non-Small Business Cases Filed Under Chapter 11 of Title 11,” according to a press release. The Final Rule, which is authorized by 28 U.S.C. § 589b, requires that chapter 11 debtors in possession and trustees — other than small business debtors — file monthly operating reports (MORs) and post-confirmation reports (PCRs) using streamlined, data-embedded, uniform forms in every case in every judicial district where the USTP operates. The Final Rule will be in effect for all reports filed on or after June 21, 2021. Prior to the effective date, the USTP encourages bankruptcy professionals to engage with their local USTP offices to learn more about the Final Rule and forms so that they will be ready to file data-embedded MORs and PCRs beginning June 21, 2021. Local USTP offices will make training available for bankruptcy professionals about completing, filing and serving the new uniform MOR and PCR forms. The uniform forms and instructions for their use and filing, which may be periodically updated prior to the effective date, are available on the USTP’s website at​​​

Applications for ABI’s 2021 40 Under 40 Class Due June 30
ABI’s “40 Under 40” program recognizes outstanding bankruptcy, insolvency and restructuring professionals from around the world who are 40 years old or younger as of Dec. 1, 2021. The application deadline for members of the 2021 Class is June 30. Honorees will be announced in October and recognized at a special awards ceremony during the 2021 Winter Leadership Conference in early December. In addition:

• Honorees will be invited to attend an exclusive reception with ABI leaders and judicial faculty at the Winter Leadership Conference, as well as future special events;
• Honorees will be profiled on ABI’s website and in the ABI Journal; and
• Each class of honorees will receive other special recognition when attending ABI events. Know a colleague who should be recognized, or would you like to nominate yourself? Click here.

Sign up Today to Receive Rochelle’s Daily Wire by E-mail!
Have you signed up for Rochelle’s Daily Wire in the ABI Newsroom? Receive Bill Rochelle’s exclusive perspectives and analyses of important case decisions via e-mail!

Tap into Rochelle’s Daily Wire via the ABI Newsroom and Twitter!


New on ABI’s Bankruptcy Blog Exchange: CFPB Restarts Military Lending Act Exams

After a three-year hiatus, the Consumer Financial Protection Bureau is getting back to examining lenders for potential violations of a law protecting service members from overpaying for financial services, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

© 2021 American Bankruptcy Institute
All Rights Reserved.
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314