The United States went into the Great Lockdown with the most household debt in history, stagnant incomes for all but high earners, and armies of people telling pollsters they were living paycheck to paycheck. Then, for millions, their paychecks stopped.
But instead of a stampede to the bankruptcy courts, personal bankruptcy filings — a useful, if extreme, indicator of the financial health of the American consumer — have dropped sharply from April through June, even as unemployment soared, according to calculations by the American Bankruptcy Institute based on data from Epiq Global, a legal research and analytics firm.
“Filings have just gone through the floor,” said Henry E. Hildebrand III, a consumer bankruptcy trustee in Nashville. Such trustees supervise the finances of people who have declared bankruptcy and agreed to pay creditors over three to five years. Mr. Hildebrand usually gets 350 to 400 new cases a month, he said, but last month he added just 107. Nationwide, the drop in personal bankruptcy filings is the biggest in 15 years.
One reason for this counterintuitive picture: The federal government’s stimulus package, which, beginning in April, has put cash into unemployed people’s hands on a weekly basis, allowing them not just to buy groceries and pay rent, but to pay down existing debt.
As of mid-June, the Treasury Department had issued nearly $270 billion worth of stimulus payments to some 160 million people. Unemployment benefits, which normally average about $340 a week, were temporarily increased by $600 a week. Some unemployed people now have more income than when they were working.
But those benefits are set to expire this month. Congress will take up the issue of whether to extend them, along with other emergency aid, when the Senate returns next week, but if no more aid is forthcoming after July — given the double-digit unemployment rate and a resurgent virus in many parts of the country — a far more dire portrait of the financial pain of millions of Americans is set to emerge in the coming months. Bankruptcy experts say consumer bankruptcy filings will then start to rise.
The banking industry is already gearing up for a wave of defaults on everything from mortgages to credit card debt. Several of the nation’s biggest banks, including JPMorgan Chase, Wells Fargo and Citigroup, said in their second-quarter earnings reports that they had added tens of billions of dollars to their reserves to cover losses they expect to incur on business and consumer loans.
Jess Brown, 42, quit her marketing job two years ago to start a small house-sitting business, but ended up crushed under more than $40,000 of credit card debt. The card companies offered her rehabilitation plans, but only if she let them automatically withdraw the payments from her checking account. That led to overdrafts and bank penalties.
Not knowing what else to do, last October she dropped out of those plans, moved in with relatives, changed her phone and avoided the debt collectors. She went online to learn about budgeting and compound interest and tried to research consumer bankruptcy too, but got mostly spam from debt-consolidation companies.
Then came the pandemic. With her patchy recent earnings record, Ms. Brown was eligible for just $135 a week of regular unemployment compensation. But the supplementary $600 has kept her afloat and given her the means to keep looking for work. Ms. Brown tries not to think what will happen if the federal relief stops.
“It only brings me emotional distress,” she said.
For the economy as a whole, which is driven by consumer spending, that extra $600 a week has been “nothing short of a game-changer,” said Matt Schulz, chief industry analyst for LendingTree, the online credit marketplace. The company recently reviewed a large sample of credit card data from 800,000 users and found that unpaid balances, late payments and usage all fell from February to May, as the federal money began to flow.
“Instead of just squeaking by, that extra money has allowed many Americans to actually pay down debt and increase savings in ways that would be unimaginable under normal terms of unemployment,” Mr. Schulz said.
But even if Congress extends the relief measures, they are a temporary salve that will do little to change the long-term patterns of income stagnation and indebtedness that have left American households so vulnerable to a financial shock. Total household debt reached $14.3 trillion in the first quarter of this year, according to the Federal Reserve Bank of New York — a record.
Most of the economic gains from the last 30 years of economic growth, except for the Great Recession, have been going to top earners, leaving the bottom half of wage-earning America struggling — and also highly indebted. Research from Gabriel Zucman and Emmanuel Saez, professors at the University of California, Berkeley, showed that in 2018, those in the bottom half carried debt that was 219 percent of their income. And that’s who was hit first and hardest by the economic shock this spring.
Nearly 40 percent of households earning less than $40,000 a year had already lost at least one job by May, according to the Federal Reserve, which has been analyzing household finances closely. That compares with just 19 percent of households earning $40,000 to $100,000, and 13 percent of households earning more than $100,000 a year.
A survey done in May by the Census Bureau showed further that younger households, and those with less education and lower earnings, were likeliest to be losing income in the shutdowns. They were also likelier to say they could not make their rent or mortgage payments and had sought forbearance.
Jenny Doling, a consumer bankruptcy lawyer in San Diego, said that consumers whose debts start to snowball were generally better off seeking protection in bankruptcy right away. That’s because bankruptcy automatically halts creditors’ collection efforts, giving insolvent consumers a safe place to work out their three- to five-year repayment plans, and possibly save important assets like a house or a car.
But for many, the idea of bankruptcy comes with the threat of a stigma.
“Filing bankruptcy, for consumers, is sort of an admission that you’re a financial failure and people just can’t admit that,” said John Rao, a lawyer at the National Consumer Law Center in Boston. “They still think that they can pull out of it somehow.”
People also get sticker-shock when they hear that the cheapest consumer bankruptcy case, a liquidation, is likely to cost about $1,500. In 2005, amid concerns that spendthrift consumers were abusing the bankruptcy system, Congress tightened the laws, increasing the cost of a case and requiring legal fees to be paid upfront. The following year, the number of cases fell to around 600,000 from more than two million in 2005, but began climbing again in the aftermath of the 2008 financial crisis. Last year, 752,160 cases were filed; this year, if filings continue at their current rate, there will be 590,854 cases by the end of December.
While consumers struggle, they often turn to their credit cards to make ends meet, thinking they will pay down the balance when they’re called back to work. In the meantime, they make just the minimum monthly required payment.
Each month’s unpaid interest, accruing at 20 percent or more, is then tacked onto their principal balance, causing their debt to balloon even if they don’t buy anything.
“It becomes completely unmanageable,” said Mr. Rao.
That’s what happened to Ms. Brown. She had good credit when she quit her job in early 2018, and lined up a series of house-sitting gigs in Europe, using her credit cards for airfare and food as she moved from country to country. She was stunned to see how fast the interest compounded. But she also found that when she hit the maximum on one card, other issuers would give her new ones. Sometimes they came with offers of a gift card if she spent a lot more money quickly.
Realizing she had no way out, she returned to the United States.
“I had a wall of credit card debt that was waiting for me,” she said. She kept trying to make a go of her house-sitting business. Then the economy went into shutdown and people stopped traveling. “In one day I had six cancellations,” she said.
For now, Ms. Brown said, the debt collectors have been leaving her in peace. But any day, she said, she may open the door and find a process-server standing there with the papers for a bank’s lawsuit.
“It’s not a question of ‘if’ but ‘when,’ and it weighs on me heavily,” she said.
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