Bankruptcy experts warn a wave of filings could soon happen in Texas and other states
Although he lives on a fixed income, Michael Wayne Lowman says he has tried to provide financial help for two relatives who lost their jobs during the pandemic, including a 20-year-old son who lost his job at a Wendy’s restaurant.
But then Lowman, a disabled veteran, fell behind in paying his own bills. As the medical bills and payday loans stacked up, the 48-year-old Richland Hills resident concluded he had no choice but to file for Chapter 7 bankruptcy protection.
“I’m pretty dadgum sure a lot of other people are doing to be in a situation like this, probably relatively soon if something doesn’t ease up with the economy,” Lowman, 48, said in a phone interview.
Lowman’s bankruptcy filing comes at a time when many others are postponing their day in court. Experts say the $3 trillion in federal COVID aid already provided by Congress has provided many low-income and middle class Americans with the stimulus payments, unemployment benefits and grants and loans they needed to stay afloat financially, at least temporarily.
But even as Congress prepares to vote on yet another stimulus package to extend many of those benefits, bankruptcy experts warn that a wave of filings is on the way, once the federal aid provided to individuals and businesses eventually runs out.
“The chickens are going to come home to roost, and it’s going to hit hard unless there’s another huge stimulus and people go back to work quickly,” said Reed Allmand, a lawyer who specializes in bankruptcies with offices in Hurst and Dallas. “It’s good news that bankruptcies are down, but I think most people are delaying filing bankruptcy even when they need it. A lot of this is kicking the can down the road.”
Bankruptcy filings down
So far, the impact of the COVID shutdown during the past six months hasn’t led to an increase in activity in bankruptcy courts. There have been a handful of high-profile cases involving insolvent retailers such as JCPenney, Neiman Marcus and Fort Worth-based Pier 1 Imports, but overall the number of filings is significantly down.
Personal bankruptcy cases filed January through June are down 16% in Texas, and 23% nationwide, compared to the same time last year, according to the American Bankruptcy Institute.
Among personal bankruptcies, Texans filed 8,060 Chapter 7 cases and 5,752 Chapter 13 cases so far this year, according to the institute. Chapter 7 allows residents to clear most of their debts (with some exceptions, including student loans), while keeping their home and retirement plan.
Chapter 13, which is typically offered to those with at least some disposable income, offers residents a chance to reorganize their debts on a court-approved schedule.
For businesses, commercial bankruptcies are down 11% nationwide compared to the same time last year, according to the institute.
Courts could be overwhelmed
Nationally, some people who work in the bankruptcy industry worry about an upcoming spike in cases. They say the federal courts, where bankruptcy cases are filed, might need to hire additional employees to handle the cases.
Robert Keach, director of the American College of Bankruptcy, recently told The New York Times that there could be “a COVID-19 cliff” after federal and state aid to businesses runs out.
Allmand said that, when the federal assistance runs out, many people who were teetering on the edge of financial insolvency before the pandemic — whether at home or in their business — will find themselves in the same financial boat as they did before the government checks arrived.
Allmand said the number of appointments at his Hurst office, which employs about 20 people, is down about 30% today compared to this time a year ago. That estimate includes virtual appointments held with clients online.
Right now, mortgage companies, credit card issuers and other lenders are helping many distressed customers with repayment plans — offered assisted with government grants and loans. But those lenders will become more aggressive in collecting their debts once the economy improves, Allmand said.
“When the economy starts to recover, that’s when a lot of the bankruptcies start to happen,” Allmand said.
Lowman said he is eager to get the bankruptcy over with, so he can focus on rebuilding his credit reputation and buy a homestead.
“I do want to use a VA loan to get some land of my own,” he said. “That’s my dream.”
