Bankruptcy in America: Tracking Commercial and Personal Filings by State

COVID-19 has impacted virtually every sector of the U.S. economy. Struggles in one sector caused ripple effects on others when stay-at-home orders halted or curtailed normal business operations. Unemployment has reached historic levels, and in April, consumer confidence dropped to its lowest point since 2014 and has yet to rebound to pre-COVID-19 levels. Hertz, Neiman Marcus and JCPenny are just some of the corporations that have already filed for bankruptcy.

Though commercial bankruptcy filings in 2020 are higher than they were in the same period of 2019, that trend began in January — before the pandemic. A surge of personal and commercial bankruptcies seems inevitable in the wake of the coronavirus, but it hasn’t hit yet.

Since the start of the coronavirus, personal bankruptcies have declined in most states compared to prior periods. Court closures have artificially slowed bankruptcy proceedings. Financial relief for businesses and individuals through the coronavirus relief bill, which delivered direct payments to individuals and Paycheck Protection Program loans to help businesses pay employee wages, has temporarily offset losses.

That does not mean Americans are out of the woods financially. Bankruptcies tend to be a lagging indicator of economic health, and some experts are predicting an abundance of bankruptcy filings in the coming months. MoneyGeek has analyzed the correlation between monthly unemployment levels and bankruptcy rates since 2006 and found a strong historical correlation except for the months following February 2020. Once the factors that are temporarily suppressing bankruptcy filings cease, the full economic impact of COVID-19 will become more evident. To gauge the financial effects of COVID-19 on individuals and businesses, MoneyGeek will be tracking bankruptcies over the next several months.

When businesses struggle, debt payments can make financial turnaround impossible. For companies in distress yet potentially viable, Chapter 11 bankruptcy is an option to restructure, and in some cases, dismiss some of the company's debt. This process can be time consuming and costly, and it tends to be a better solution for large corporations rather than small businesses, according to a recent Brookings report. For small and mid-sized companies, bankruptcy costs can be as high as 30% of the business's value, and a reorganization doesn't make sense. Two-thirds of companies that file for Chapter 11 are liquidated rather than reorganized.

While there was a pre-pandemic uptick in Chapter 11 filings, commercial bankruptcies are also likely to increase due to economic hardships and depressed consumer demand in the pandemic. MoneyGeek has compiled bankruptcy filing data published by the American Bankruptcy Institute, updated monthly to track the ongoing economic impact of COVID-19.

Delaware, a favorite state for business incorporations because of low-tax rates and business-friendly policies, has the most business bankruptcy filings. While Delaware has experienced a large number of filings related to COVID-19, it doesn’t necessarily have the highest rate of business bankruptcy filings. To adjust for state population differences, we based our rankings on filings per 10,00 businesses.

* Due to the large number of businesses that are incorporated in the state of Delaware, the count of Delaware businesses used to calculate the rate have been adjusted to 1.5 million as reported in Delaware's Annual Report.

When consumers encounter financial hardship they cannot recover from on their own, bankruptcy allows them to resolve their debts and move on. The two primary forms of bankruptcy for individuals are Chapter 7, which entails liquidating assets to pay off debts, and Chapter 13, which creates a long-range payment plan to stave off property foreclosure. Bankruptcy is typically an option of last resort, as it can cause stress and long-term credit damage.

Analyzing Chapter 7 and 13 bankruptcies filed since March 2020 as published by the American Bankruptcy Institute, MoneyGeek has ranked states by their number of personal bankruptcies. To adjust for population differences, we've based our rankings on filings per 100,000 people.

If you've been hit hard financially by the pandemic, you are not alone. Millions of Americans face unemployment, and many businesses have received government funds to help them try to weather economic devastation. Especially in the pandemic, there is no shame in facing financial hardships and feeling like you're out of options.

If debt settlement or consolidation doesn't offer a path out of your financial struggles, bankruptcy could be a viable option.

Bankruptcy can be hard to swallow emotionally, and it carries practical consequences like required waiting periods for future mortgages. Still, depending on your situation — whether you'd file for bankruptcy individually or for your business — learning about your bankruptcy options could give you some peace of mind.

Chapter 7 bankruptcy is an approach where individuals liquidate assets to pay off debts. Chapter 7 works best for people who have unsecured debt they've taken on without pledging collateral such as credit cards or medical debt. If you have assets you can liquidate, Chapter 7 bankruptcies can resolve your debt relatively quickly and give you a chance to start fresh.

Chapter 13 bankruptcy is designed for individuals who have a home or other secured property at risk of foreclosure. In Chapter 13 bankruptcy, individuals develop a three-to-five-year payment plan that allows for more manageable payments. You must have regular income to cover the reset payment amounts.

If you own a business and you're struggling to make the financial equation work, Chapter 11 bankruptcy might be a lifeline. Filing for Chapter 11 enables you to restructure your debts so you can make affordable payments. Your business must be viable, and you'll need a plan to make it sustainable under new terms.

Filing for bankruptcy can be a lifeline for people and businesses facing financial hardships, but it's not a step to take lightly.

"Some people may feel a 'moral aversion' to bankruptcy as if they are cheating society or being dishonest. However, we have bankruptcy protection for very good reasons," says Shawn A. Cole, the John G. McLean professor of business administration at Harvard Business School.

"Individual bankruptcy law, in particular, is designed to help people when they are at a vulnerable time and encourage risk-taking, such as entrepreneurship, vital to economic growth. In practice, firms, lenders and even our current president routinely file for bankruptcy. So I would encourage individuals to rationally examine the benefits and costs of bankruptcy protection, rather than following emotion," says Cole.

Over time, consumers can rebuild their credit and access credit cards, auto loans, and even mortgages. Though many consumers facing financial distress may feel their situation is bleak, bankruptcy creates a path for consumers to start over financially.

To create the personal and commercial bankruptcy rankings by state, MoneyGeek utilized monthly bankruptcy filing data published by the American Bankruptcy Institute. We calculated the number of bankruptcies filed since March 2020 in each state to measure bankruptcy trends since COVID-19. To adjust for population differences, MoneyGeek utilized U.S. Census data to calculate per capita and per business rates of bankruptcy.