COVID-19 Bankruptcy Study
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.
An Uptick of Bankruptcies Is Predicted
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.
Commercial Bankruptcies by State
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.
Rates of COVID-19 Chapter 11 Filings by State
* 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.
Personal Bankruptcies by State
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.
States With the Most COVID-19 Personal Bankruptcies
Filing for Bankruptcy During COVID-19
a man and woman discuss their bankruptcy options as they review their debts
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.
Expert Advice on Bankruptcy
Many factors inform the decision to file for bankruptcy. MoneyGeek gathered advice from professionals with expertise in business, economics and finance to answer pressing questions about bankruptcy. These specialists offer solutions and guidance for businesses and individuals looking to make major financial decisions.
Jeremy R. Fischer, Chair, American Bankruptcy Institute’s Bankruptcy Litigation Committee and Practice Group Leader, Bankruptcy, Restructuring & Creditors’ Rights, Drummond Woodsum, Portland, Maine
Lois R. Lupica, Maine Law Foundation Professor of Law, University of Maine School of Law
Paul Sheard, Ph.D, Research Fellow at the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School. He formerly held chief economist positions at leading financial institutions in New York and Tokyo.
Chester S. Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance at Carnegie Mellon’s Tepper School of Business
Karen Gordon Mills, Senior Fellow at Harvard Business School
Jackie Boies, Senior Director of Housing and Bankruptcy Services, Money Management International
Matthew Bruckner, Associate Professor of Law, Howard University School of Law
Nancy Rapoport, Garman Turner Gordon Professor of Law, Boyd Law School and Affiliate Professor of Business Law and Ethics, Lee Business School, University of Nevada, Las Vegas
Henry J. Sommer, President, National Consumer Bankruptcy Rights Center
Jeremy R. Fisher: The first step for a consumer is to identify what is causing the distress. Is it a mortgage default? An aggressive credit card collector? Health care debt? Those are the most common problems consumers face, and there are significant resources available for each. Banks, for instance, are deferring payments during the pandemic. Credit card companies are toning down collection tactics based not only on the reputational risk of dunning at this time but also because people have fewer available assets right now to collect from. And few health care providers are aggressive collectors – even in good times, favorable payment plans are available.
It’s also important to know that bankruptcy does not fix every problem. If you have lost your job and have no income, bankruptcy can discharge your debts, but it doesn’t help you pay your bills going forward. Moreover, if you choose to file now, those future debts will follow you, and there are limits on repeat bankruptcy filings. Finally, bankruptcy generally does not fix problems with certain types of liabilities, most notably student loans and domestic support obligations. So, before considering bankruptcy, consumers should exhaust other options, as well as government assistance programs (e.g., enhanced unemployment benefits).
If you have questions and cannot afford an attorney, the American Bar Association has a website where volunteer attorneys like me answer questions anonymously. If you plan to file for bankruptcy and cannot afford an attorney, try to qualify for civil legal aid programs like a volunteer lawyers’ project in your state. Bankruptcy is complicated, and you need an attorney to navigate the process successfully.
Lois R. Lupica: Typically, there is a lot of deferred "maintenance" when someone has filed for bankruptcy protection. People have put off things such as going to the dentist, getting new tires and buying school clothes for the kids. If one knows they are going to file, they should be aware of the relevant exemptions (state or federal, depending upon the jurisdiction) and make sure that they can take full advantage of them. While it is important that people not incur additional debt that is not intended to be repaid, if a potential filer has any cash at all, they should spend it on things they need. In addition to taking care of maintenance items, they should stock their pantry, fill their gas tanks and home oil tanks and pay for other practical items. If they know that they will be incurring a significant expense in the near future like a medical bill, they should wait to file until they incur that expense — otherwise, it will be non-dischargeable. It is a good idea to consult a lawyer to help decide which chapter makes the most sense. Typically lawyers provide free consultations.
Paul Sheard: Obviously, they want to explore all the financial resources and options available from the federal and state and local governments. Unfortunately, applications for the Small Business Administration's (SBA) Payroll Protection Program (PPP), established under the CARES Act, have closed. Still, there is a chance the program will be extended in the next round of "stimulus," so they should keep an eye out for that. The SBA has other programs, however.
The Federal Reserve has also launched a "Main Street Lending Program," which is aimed at small businesses, not individuals. It is a bit complicated but would be worth exploring.
People on the verge of bankruptcy typically don't have a lot of money to hire top-notch bankruptcy lawyers. It is worth exploring what public or nonprofit resources are available free or at minimal cost to help navigate this complex process, including just figuring out what options exist and what financial resources might be available.
Chester S. Spatt: I would recommend that individuals contemplating a bankruptcy filing (or in bankruptcy) obtain advice from a competent bankruptcy attorney as there may be actions to take that would mitigate the adverse consequences or limit the damage.
Karen Gordon Mills: Filing for bankruptcy can be an extremely complicated process, requiring filers to gather and fill out numerous financial forms. Individuals and businesses going through bankruptcy should, therefore, consider getting assistance from an accountant and/or relationship banker. Business owners in particular should consult similar businesses in their area to gain insights from others’ experiences. For example, Alignable is an online community that connects local businesses and provides advice on a variety of small business matters. Industry and neighborhood business associations, as well as Small Business Development Centers and SCORE advisors, can also be valuable sources of information and counseling for any business experiencing financial difficulties.
Jackie Boies: Prior to filing bankruptcy, you’ll be required to complete pre-filing counseling. We recommend that you complete this course online or with a bankruptcy counselor at MMI. There are a number of things you should learn in your pre-filing counseling course, including general information about bankruptcy and, more personally, how bankruptcy will affect your unique situation and how you will manage financially following bankruptcy.
Matthew Bruckner: Individuals should seek expert advice, but that advice needs not to be expensive and can often be free. For example, in Washington, D.C., we have a bankruptcy assistance center. Twice a month, volunteer attorneys provide free legal advice to people considering bankruptcy. Similarly, people should look at law schools to see if they offer free or low-cost advice via a clinic. In New York, St. John's Law has a bankruptcy advocacy clinic that matches law students (operating under the supervision of a licensed attorney) with New Yorkers that need help with the bankruptcy process. Finally, a nonprofit like Upsolve might be able to help at low-cost.
Nancy Rapoport: The U.S. Bankruptcy Court is a good place to start. The American Bankruptcy Institute has a Veterans Affairs Task Force that is a good resource for active service members and veterans.
Henry J. Sommer: Individuals must consult a qualified bankruptcy attorney. It is impossible to plan without knowing your legal options and other options the attorney can explain. Early advice will also prevent mistakes that could lead to an unnecessary loss of property or other harmful consequences if bankruptcy is ultimately filed. And, at all costs, avoid debt settlement companies, which are complete scams.
Susan E. Hauser: Consumer debtors tend to exhaust available resources before filing bankruptcy as a last resort. Most people hang on, hope things will improve and file bankruptcy only when faced with an imminent crisis like the impending loss of a house or car. The current economic situation is different from anything we’ve seen in our lifetimes, however. We’re watching an economic train wreck in real time. In this situation, individuals facing a sustained loss of income should proactively plan their personal bridge to the recovery that will eventually come.
Pre-bankruptcy planning should include cutting expenses, prioritizing which bills must be paid and which can be deferred and determining how to protect essential property. Part of that planning should be consulting a bankruptcy attorney for advice. Most states have free or low-cost legal aid programs, and some bankruptcy attorneys also offer free or low-cost initial consultations. Local bar associations are also gearing up to provide free counseling on a pro bono basis. Bankruptcy is complicated, and individual debtors need the help of an attorney to avoid costly mistakes. A good attorney can guide the client through pre-filing financial decisions relating to cash and necessary purchases, the differences between secured and unsecured claims, and the debtor’s ability to use exemptions law to retain essential property. The attorney can also help the client make the critical choice between a Chapter 7 liquidation and a Chapter 13 reorganization.
Reed Allmand: A consumer should get to know the basics and the types of bankruptcy available to them. The two main bankruptcy chapters for a consumer are Chapter 7 bankruptcy and Chapter 13 bankruptcy. A Chapter 7 bankruptcy allows the consumer to wipe out certain unsecured debt such as credit cards, medical bills, lawsuits, payday loans and certain IRS taxes. A Chapter 13 bankruptcy is a payment plan for consumers that make too much money to file a Chapter 7 or who choose Chapter 13 to stop garnishments, repossessions, foreclosures, tax levy or other debt collection activities and allow the consumer to catch up any past-due payments over a three- to five-year plan. Many consumers who have lost their jobs and are now getting unemployment may qualify for Chapter 7 when they otherwise would not. Their income average for the prior six months allows them to pass the means test for Chapter 7 eligibility. However, if the consumer does not take advantage of that opportunity, it will go away when they become fully employed again.
There are several things that anyone considering should avoid doing before filing a bankruptcy case.
First, don't run up credit card debt or other debt in anticipation of filing bankruptcy if you do not intend to pay it back. The debt might be challenged and excepted from the bankruptcy discharge.
Second, don't transfer property to friends or family members out of fear of losing the property. The bankruptcy trustee can avoid these preferential transfers. The bankruptcy attorney might be able to protect or exempt the property if the attorney was consulted prior to the consumer making the transfer.
Third, don't liquidate a 401(k) or another qualified retirement account to pay unsecured debt. Retirement funds are exempt and protected upon the filing of a bankruptcy case in most situations.
Fourth, don't cash out equity in your house with a home equity loan. In most cases, the equity in your home can be protected upon the filing of the bankruptcy case.
And fifth, don't attempt to hide or conceal assets. The bankruptcy schedules are signed under penalty of perjury. Concealing or hiding assets may result in severe sanctions or jail time.
Consumers should also avoid these five most common reasons bankruptcy is dismissed: The consumer fails to file all of the bankruptcy schedules timely, provide other required documents such as tax returns or pay stubs, complete the credit counseling course needed within 120 days before filing the case, attend a required hearing after the bankruptcy case or make all the necessary bankruptcy plan payments in a Chapter 13 case.
If a consumer files a Chapter 7 bankruptcy case, they need to make sure that they read all of the notices received from the bankruptcy court and monitor the bankruptcy case by reviewing all documents filed in the case and hearings scheduled. Consumers can create an account for free where they can see notices regarding their case. The consumer should be aware that there is a small search fee that applies to limit their searches to once a week or every other week.
If you filed a Chapter 13 bankruptcy case, I suggest you create an account with PACER as explained above and the National Data Center. This will allow you to review information from the Chapter 13 trustees website, such as a listing of all payments made and notices about a change in payments or payment delinquencies.
Jeremy R. Fisher: As with consumers, companies in distress need to evaluate the cause and take action to address it from a business perspective. Cut costs. Focus on higher profit lines. Retool to take advantage of the current crisis — for instance, there are severe shortages of certain products right now, so certain manufacturers can repurpose idled equipment to produce high demand products.
For businesses that own their facilities, talk to the bank that has liens on your real estate and business assets. Most banks are willing to be flexible and try to help their borrowers survive. Trying to liquidate collateral under current conditions will often lead to sizable losses that can be avoided by a sensible restructuring and forbearance agreement.
For businesses that rent or lease their facilities, landlords are similarly willing to make deals to support their tenants through this crisis. Landlords would prefer lower or even no payments now to keep a good tenant longer term. The obvious carrying costs of vacant properties is a huge incentive for landlords to make deals.
Major creditors like banks and landlords know that bankruptcy is often an unfavorable environment, so a credible threat of a filing by competent counsel often helps negotiations progress. On the other hand, these major creditors know that bankruptcy is a considerable risk for a business, especially its decision-makers, who are often owners. Even a Chapter 11 reorganization may mean that equity is "wiped out." One crucial point is that Congress has recently amended the Bankruptcy Code to add a new Subchapter V to Chapter 11 under the Small Business Reorganization Act. Subchapter V is intended for small, closely-held businesses with less than $2.7 million in liabilities. A unique feature of Subchapter V is that it changes the calculus for a filing because equity is not "wiped out," meaning the risk to owners of bankruptcy is much less. Moreover, under the CARES Act, the debt limit was increased to $7.5 million for Subchapter V until April 2021, so larger businesses can take advantage of bankruptcy with less risk for a limited period.
The bottom line is that businesses need sound advice from seasoned legal and financial advisors before engaging in brinkmanship about a bankruptcy filing.
Lois R. Lupica: Bankruptcy helps businesses with balance sheet problems. It does not help a business that has little chance of survival. Avoiding bankruptcy is not necessarily the goal. Figuring out the cause of the financial difficulty and determining if the bankruptcy process can address it is the issue.
Paul Sheard: Presumably, the main one would be to work with the creditors to try to work out a plan for keeping the business going through tough times. Bankruptcy can be a negative-sum game: bad for the debtors and creditors alike. Bankruptcy is triggered when debtors cannot meet their debt obligations, and the creditors force their rights to be repaid or seize assets (or debtors seek shelter from their creditors). Sometimes that can be averted by convincing the creditors they will be better off in the long-run by forbearing or agreeing on debt relief.
Chester S. Spatt: General advice is difficult because there is such a range of circumstances. These situations are often complex with many tradeoffs, including evaluating payments to various creditors. Among the special issues that arise with business bankruptcies are limiting personal liability (especially in the context of employment tax liabilities and personally guaranteed obligations) and trying to manage most effectively the continuation option before a bankruptcy is inevitable. On the latter front, it can be very costly when a creditor forces a business into bankruptcy prematurely or when suppliers are unwilling to supply new merchandise. Again, high quality advice would be useful to understand the goals and tradeoffs underlying the effective management of a difficult business and financial situation.
Karen Gordon Mills: The COVID-19 pandemic has forced all businesses to reevaluate how they operate and market their products and services. Looking ahead, business owners should delve into their financials with a fresh eye to see which expenses are absolutely necessary and which are not. Small businesses should ask themselves: who are the customers I truly want to serve and what products do they value most? For small businesses who previously lacked an online or social media presence, perhaps now is the time to build a website and start advertising on Instagram. View the coronavirus disruption as an opportunity to innovate and future-proof your business plan.
Jackie Boies: Business bankruptcies can be very complex. Before moving forward, take an objective look at your business to see if it can be salvaged. You may also need to seek the advice of a trusted advisor — a financial planner, tax professional or business development coach. Contact your local university, Chamber of Commerce, small business development center or women’s and veteran’s business center for business assistance and mentoring programs that are generally free.
Nancy Rapoport: Avoiding bankruptcy is not necessarily the right decision. It depends on why the business needs financial relief. For example, if the business had, long ago, entered into some inadvisable leases, bankruptcy is a way to think about which leases to keep and which ones to break. Or if there's one creditor that's trying to bully a business into benefitting it, instead of helping with the larger picture, that might be another reason to file. But businesses should keep track of income, expenses and upcoming deadlines as well as industry trends. If an industry is threatened (think "live-performance venues" as an example during COVID-19), then the question that a business must ask itself is if the problem is cyclical and may go away with restructuring or if it's a permanent shift. Find a good bankruptcy lawyer — preferably one who's board-certified or a member of a prestigious organization, such as the American College of Bankruptcy. You want a restructuring lawyer who practices in this area full-time, rather than dabbling because bankruptcy is a hot practice area now.
Susan E. Hauser: It's simple but true: Businesses need cash to operate. If a business has lost cash flow because of the pandemic, it must formulate a plan to reduce expenses and find alternate sources of money. Both of these steps are critical. The federal government's PPP program has supplied emergency cash that has provided a temporary lifeline for many businesses. This relief isn't a long-term strategy, however. As we're seeing, it is subject to the political risk that it will be discontinued by Congress. In normal times, businesses frequently avoid bankruptcy or reorganize by retooling the goods or services that they sell. We're seeing some businesses do this now, responding to market forces by converting textile production lines to manufacture facemasks, for example.
If a small business finds itself facing bankruptcy, the first step will be to consult an insolvency professional and obtain expert advice on how to proceed. If bankruptcy is the best option, a new Subchapter V small business option was added to Chapter 11 of the Bankruptcy Code in February of 2020. Subchapter V reduces the cost of Chapter 11 and streamlines the process by providing for the oversight of a trustee. Subchapter V also makes it easier for the existing owners to maintain ownership after confirmation of the plan of reorganization. In the CARES Act, Congress temporarily increased the Subchapter V debt eligibility limit to $7.5 million, opening this protection to a larger subset of small businesses. Because Subchapter V is so new, the interpretative case law is currently being developed, and it is certain to be shaped by the pandemic. It's clear that the increased debt limit only applies to cases filed after the CARES Act, but other aspects of the law are unclear — for example, whether it can be used for a business that is not actively engaged in business.
Reorganization and continued operation are not feasible for every business. If the business is facing liquidation, this may occur outside of bankruptcy in a state law dissolution of the entity. It is also possible to liquidate a business within a Chapter 11 bankruptcy. Although this is more expensive, a liquidating Chapter 11 may offer advantages that should be explored with an insolvency professional. For example, a liquidating Chapter 11 may allow the debtor to structure protection for business owners who have personally guaranteed loans. It may enable the debtor to maximize value through the sale of assets.
Jeremy R. Fisher: Bankruptcy is a two-edged sword in many ways for consumers. It allows them to discharge most debts (most notably, this does not generally include student loan debts) and get a "fresh start" free from the weight of existing liabilities. However, it hurts your ability to get credit for a period, making it difficult for some to get back on their feet. The best advice for consumers is to make bankruptcy a once-in-a-lifetime experience – you are getting a fresh start, so make the most of it. Learn from your past problems and avoid making the same mistakes again.
For businesses, it's a little different. If a business files for Chapter 7 and liquidates, that's simply the end of the business. Even in Chapter 11, asset sales are standard, meaning that the bankrupt company's business is done. If there is a reorganization under Chapter 11, businesses need to work hard to repair relationships with vendors and customers. That starts with performing all obligations under the reorganization plan and not defaulting. It also means building confidence again. Businesses, like individuals, may find it hard to obtain credit after a bankruptcy, especially on an unsecured basis from vendors. "Cash on delivery" makes it difficult to manage operations for many businesses. However, repeat filings (often referred to as "chapter 22s" and "chapter 33s") are not uncommon these days, especially for larger businesses.
Lois R. Lupica: I did a study a number of years ago examining the issue of how long it takes a family to recover from (consumer) bankruptcy. I believe we found that it was a few years. Again, bankruptcy does not help a family using debt to bridge the gap between income and expenses. It helps to discharge past debt but does nothing with respect to future debt. If the family was living beyond their means, then cutting back on expenses would help going forward. Typically, the issue is not families living beyond their means — but unexpected and uninsured medical debt, low wages, high costs of living, etc.
Concerning businesses, the owner, management or board needs to look carefully and closely at the business model. Is there a market for what is being sold? Did financial distress result from a "blip," such as COVID, or was the business struggling before? Even if it was an "event" – what will change after the "event" is over? Will customers return to restaurants? Movie theatres? Retail shops? Or have we permanently moved to online purchasing and streaming services? This is very much a business analysis.
Paul Sheard: Look on the bright side and to the future.
Chester S. Spatt: Obviously, it is important to limit the use of credit (if it is even available) and be especially careful about high interest rate borrowing. The management of resources is crucial.
Karen Gordon Mills: Because filing for bankruptcy can dramatically affect your credit, keeping track of your credit score and taking steps to rebuild it are paramount in recovery. Individuals and small businesses should also critically examine previous financial missteps that led to the bankruptcy, and build a personal or business financial management plan that avoids repeating those mistakes. For an individual, that may mean making payments on time and following a budget. For a small business, that may mean avoiding stacking high interest loan products and saving for an emergency fund, knowing well how tenuous their cash buffers can be.
Jackie Boies: Recovering from bankruptcy will take time and patience. You will get immediate relief from some payments, phone calls and harassment, but you’ll have to work to improve your financial situation and repair your credit.
If you made financial mistakes that led to your bankruptcy, don’t repeat them!
Begin by thoroughly reviewing the income you have coming into your household. While bankruptcy will eliminate some monthly payments, it will not increase your income. If your living costs exceed your income after filing bankruptcy, you'll need to reduce expenses, increase your income or both.
Now that you have some relief, faithfully follow the budget you developed with your counselor. Do not be tempted to increase your spending or create new debt. Start a savings plan and build an emergency fund. You’ll want three to six months of living expenses and other payments in your emergency savings account. Building a savings plan will help you handle small emergencies along the way.
If you have debts that were not part of your bankruptcy, such as your mortgage, student loans or auto loans, make their payments a priority and pay them on time. You should also maintain payments on your other expenses like cell phones, utilities and future medical bills to ensure nothing lands in collections, negatively impacting your credit report after your bankruptcy.
Don’t get pulled into credit repair scams. Repairing your credit following bankruptcy is something you can do yourself and at no cost.
Begin by reviewing your credit reports, all three of them. You can view them free at AnnualCreditReport.com. Zero in on any errors or accounts not updated following your bankruptcy and complete the simple dispute process. Monitor your credit report on a regular basis, at least annually, once your report is correct and up to date. Once the time is right, you can begin using credit, building new credit and think about obtaining a secured credit card or regular credit card. You'll want to carefully review the terms and don't accept a high rate or fees. Don't use other forms of high-rate credit, just for the sake of creating new credit. Once you have a new credit card, keep the balance very low and well below the established limit. Pay the balance off every month.
Nancy Rapoport: The most important thing is the discharge from debts given to the honest but unfortunate debtor. Bankruptcy is a way of forgiving — of not dooming someone to a life of misery based on a wrong decision or bad luck. An honest debtor who is careful to be precise in listing creditors and debts and following all of the bankruptcy rules will be able to walk away from most of the problems and get a fresh start. Bankruptcy can be a lifesaver to our economy.
Henry J. Sommer: Individuals should rebuild their credit slowly, starting with a secured credit card. For businesses, a careful business plan is a necessity.
Nancy E. Hauser: Both consumers and businesses should examine the source of the financial distress that led to bankruptcy. If things were fine before COVID-19, bankruptcy could serve as a bridge taking the debtor into the recovering economy. Bankruptcy generally deals with past debt and won't address most financial problems that occur after the petition is filed. Limits on the bankruptcy discharge may also require the debtor to time the case so that the maximum benefit can be received. After bankruptcy, individual and commercial debtors need a sound financial plan to reestablish cash flow and credit. Consumer bankruptcy provisions require individual debtors to undergo a basic level of credit counseling. Individuals should use this guidance to develop a budget, reduce expenses and ensure that payments are timely. Consumers should also monitor their credit score. Both consumers and businesses should carefully monitor credit, actively look for the least expensive credit facilities and work to accumulate a cash buffer for emergencies.
Lois R. Lupica: For individuals, can they get a side gig to earn extra income? Will whatever drove them into financial distress end (again, for example, COVID unemployment). Bankruptcy is a great tool for someone who has a temporary setback that will not happen again — it discharges past debt. But it doesn't help in the long run if the person/business is going to find themselves in the same position before long.
Paul Sheard: Carefully consider the pluses and minuses. The big plus of filing for personal bankruptcy is that it helps remove the weight of debt and allow the reset button to be pressed. The negatives include the immediate loss of your business and assets and personal and family disruption, but the longer-term consequences of declaring bankruptcy for access to credit and damage to reputation need to be considered and factored in.
Chester S. Spatt: One specific point that is worth highlighting is that retirement assets are often not part of the bankruptcy estate and typically cannot be taken by creditors (with some exceptions), so preserving and enhancing these assets may be particularly useful. However, again, I would stress the importance of getting good legal advice about this in the context of one’s situation, as with other issues involving bankruptcy.
Karen Gordon Mills: Understandably, many small business owners may be hesitant to file for bankruptcy due to the stigma and the inevitable hit to their credit. They might not know, however, that the Small Business Reorganization Act (SBRA) went into effect this past February. The SBRA streamlined, simplified, and reduced the cost of filing for Chapter 11 bankruptcy. It aims to help small businesses reorganize their debts without having to shut their doors. Any small business owner considering bankruptcy should familiarize themselves with these new restructuring laws. While they should carefully weigh the pros and cons before jumping into the process, business owners should be aware that filing for bankruptcy does not necessarily spell business death.
Jackie Boies: Going forward, commit to following sound financial practices to ensure that you are in control of your financial life!
Nancy Rapoport: First, take a breath. Think about what new debt you're incurring and whether it's really necessary. Be careful about the use of credit cards, which can quickly get out of hand. Second, get over the shame of having somehow "failed." Bankruptcy law is there for a reason. The sooner you seek advice from a reputable attorney, the sooner you can get back on your feet again.
Nancy E. Hauser: COVID-19 is forcing many people to reevaluate their financial and work plans. Some older individuals are opting to take early retirement rather than return to workplaces that feel unsafe. Many young people are returning to school as an alternative to work. For example, the weak job market for new college graduates has led to an uptick in law school applications. These strategies, which effectively take people out of the workplace, may provide viable options that provide some people with a respite until things begin to recover.
However, most people fall between these extremes, and they will need to engage in a clear-eyed examination of income, expenses, assets and liabilities. Both consumers and businesses should attempt to maximize income and cut expenses. Professional advice from a consumer lawyer or insolvency professional can help debtors prioritize which bills to pay and which can be ignored in the short term. The debtor should also seek information and make decisions on how to keep important property, particularly property that stands as collateral for a secured loan. Finally, individual debtors should seek professional advice before tapping retirement accounts. Some types of retirement accounts are not part of the bankruptcy estate, and other types of retirement accounts may be exempt. The debtor should seek professional advice on how to keep these retirement assets beyond the reach of creditors. This step may be critical to the individual's financial future.
Moving Forward Financially
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.
About the Author
Deb Gordon is author of "The Health Care Consumer's Manifesto (Praeger 2020)," a book about shopping for health care based on consumer research she conducted as a senior fellow in the Harvard Kennedy School's Mossavar-Rahmani Center for Business and Government between 2017 and 2019. Her research and writing have been published in JAMA Network Open, the Harvard Business Review blog, USA Today, RealClear Politics, TheHill and Managed Care Magazine. Deb previously held health care executive roles in health insurance and health care technology services. Deb is an Aspen Institute Health Innovators Fellow and an Eisenhower Fellow, for which she traveled to Australia, New Zealand and Singapore to explore the role of consumers in high-performing health systems. She was a 2011 Boston Business Journal 40-under-40 honoree and a volunteer in MIT's Delta V start-up accelerator, the Fierce Healthcare Innovation Awards and various mentorship programs. She earned a B.A. in bioethics from Brown University and an MBA with distinction from Harvard Business School.
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- USA Today. "With bankruptcies surging, 2020 may become one of the busiest years for Chapter 11 filings since the Great Recession." Accessed June 5, 2020.
- U.S. Department of the Treasury. "The CARES Act Works for All Americans." Accessed June 5, 2020.