Pandemic likely to exceed Great Recession in number of bankruptcies
The coronavirus pandemic that has sickened over 450,000 people in the United States and claimed thousands of lives will also create a surge in bankruptcies that is likely to eclipse that of the Great Recession.
“The assumption is that whatever happened in 2008 to 2009 in terms of bankruptcies, this is going to be worse," said Desmond Lachman, an economist at the right-leaning think tank the American Enterprise Institute. "So you’ve got to brace yourself for the whole wave of bankruptcies."
The surge of personal and business bankruptcies that began in 2008 because of the financial crisis reached its peak in 2010 when nearly 1.6 million bankruptcies were filed, according to the Administrative Office of the U.S. Courts. In 2009, there were 1.4 million bankruptcies and 1.1 million in 2008, according to the organization.
Aaron Klein, a fellow of economic studies at the Brookings Institution, thinks these numbers will be exceeded if the economic shutdown persists long enough to kill the Major League Baseball season, which has already postponed Opening Day because of the virus.
“You tell me when baseball starts and I’ll tell you [if we exceed Great Recession bankruptcies],” he said. “If baseball resumes on June 1, maybe not; if baseball resumes around the All-Star break, then maybe. If there is no season, definitely.”
Since the Great Recession the number of bankruptcies have declined, with roughly 774,000 bankruptcies being filed in 2019. The total number of bankruptcies also declined in the first quarter of 2020 by 5% when compared to bankruptcies filed during the first quarter of 2019, according to the American Bankruptcy Institute (ABI).
That is about to change. Economists from the Federal Reserve expect between 200,000 and 1 million bankruptcies will be filed over the next 12 months. The increase in filings is expected to start this month.
"We will likely see an increase in bankruptcies, starting with business filings in April and May, and increased consumer filings to follow,” ABI Executive Director Amy Quackenboss told the Washington Examiner via email, adding that “the magnitude of the increase in filings will depend on how long and deep the economic crisis goes on.”
Based on the most significant indicators, the economic damage from the pandemic already exceeds what occurred during the Great Recession.
On the jobs front, over the past three weeks more than 17 million workers have claimed unemployment benefits. Job losses totaled 8.7 million for the entire Great Recession.
For small businesses, the current crisis is likely to be grim, National Consumer Law Center attorney John Rao told the Washington Examiner.
“I think there is likely to be more small businesses affected by the pandemic than probably there were during the Great Recession,” he said.
Roughly 170,000 small businesses closed between 2008 and 2010. Over the last three months, 630,000 retailers have either permanently or temporarily closed their doors. Meanwhile, 1 in 4 small businesses say they are less than eight weeks away from closing permanently, according to polling by the U.S. Chamber of Commerce.
The dire state for small businesses is due to their narrow profit margins. Restaurants, bars, and retail shops survive on paying traffic entering their stores. Commerce was not turned off during the Great Recession the way it has been in the past few weeks. Now, retailers wait for customers to return, which could be a long time coming since a vaccine for the coronavirus is not expected for another 12 to 18 months.
“You’re not getting rid of the coronavirus until you get the vaccine which is 12 to 18 months away,” Lachman said. “My expectation is that you’re not going to get people to go to restaurants. A big chunk of people are going to be scared. And these restaurants, they’re in very poor shape [financially] to begin with. Same thing with travel, hotels or car rental companies; they’re all going to be in trouble.”
When a business goes bankrupt it doesn’t necessarily mean that it’s shutting down. For example, in a Chapter 11 bankruptcy, debts are reorganized and the business remains open. On the other hand, in a Chapter 7 bankruptcy, a business does close as its assets are liquidated and whatever money was raised goes to creditors.
Rao expects that bankruptcy courts will be able to handle the increased caseload, but the current work-from-home order could complicate things if filings start pouring in this month as expected. Like other workers, court employees are working from home.
“The real question will be if the surge occurs at a time when we’re still doing everything remotely. Hopefully, that will not be the case because that’s when there will be particular challenges for the courts to do everything remotely,” he said.
Rao noted that under normal circumstances creditors would gather in a single room and ask questions about the insolvency. These meetings are now done remotely, which adds time to completing the bankruptcy trial.
“There is the logistics of it because they are federal courts and they need to keep a record of everything that they’re doing,” he said.
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