COVID-19

Here comes the bankruptcy wave

Kimberly Adams May 14, 2020
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A temporarily closed J.Crew store in New York. The chain went bankrupt this month. Angela Weiss/AFP via Getty Images
COVID-19

Here comes the bankruptcy wave

Kimberly Adams May 14, 2020
A temporarily closed J.Crew store in New York. The chain went bankrupt this month. Angela Weiss/AFP via Getty Images
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While the federal government hammers out the next round of economic relief, families and businesses are trying to sort out what it will take to get through this crisis.

Some businesses are already turning to bankruptcy to give them time and flexibility to reorganize and reset. Many individuals are probably going to end up doing the same thing.

“We certainly expect that filings will increase depending how long the country is going to be on lockdown, and how long the COVID-19 pandemic lasts,” said Amy Quackenboss, executive director of the American Bankruptcy Institute.

In April, Chapter 11 bankruptcies, which allow businesses to reorganize so they can try to survive, were up 26 percent from last year. That’s just the beginning, said Sara Sternberg Greene, professor at Duke Law.

“We will see some who just decide they can’t survive, and they’ll file Chapter 7, which is liquidation,” she said. 

For now, Chapter 13 consumer bankruptcies are down. People are spending their savings and relief checks, said Ed Boltz, a bankruptcy attorney in North Carolina. In normal times, he said, three main things cause bankruptcies: job loss, illness and divorce. And with the pandemic, “we’ve got two out of the three already hitting. And who knows what staying at home is going to do to relationships and marriages also?” he said. 

But while a bankruptcy can wreck your credit and be a stressful experience, it can also provide an important backstop for the economy, said Matt Notowidigdo, economics professor at Northwestern University.

“One of the things the bankruptcy system does is it allows people to get a fresh start, and then try to resume somewhat back to their old path of spending, and that can help the economy overall,” he said.

Correction (May 14, 2020): An earlier audio version of this story misidentified Notowidigdo’s university. The audio has been corrected.

COVID-19 Economy FAQs

Which businesses are allowed to reopen right now? And which businesses are actually doing so?

As a patchwork of states start to reopen, businesses that fall into a gray area are wondering when they can reopen. In many places, salons are still shuttered. Bars are mostly closed, too, although restaurants may be allowed to ramp up, depending on the state. “It’s kind of all over the place,” said Elizabeth Milito of the National Federation of Independent Business.

Will you be able to go on vacation this summer?

There’s no chance that this summer will be a normal season for vacations either in the U.S. or internationally. But that doesn’t mean a trip will be impossible. People will just have to be smart about it. That could mean vacations closer to home, especially with gas prices so low. Air travel will be possible this summer, even if it is a very different experience than usual.

When does the expanded COVID-19 unemployment insurance run out?

The CARES Act, passed by Congress and signed by President Donald Trump in March, authorized extra unemployment payments, increasing the amount of money, and broadening who qualifies. The increased unemployment benefits have an expiration date — an extra $600 per week the act authorized ends on July 31.

You can find answers to more questions here.

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