Commentary: After the COVID-19 Deluge, a Bankruptcy Tidal Wave?

Commentary: After the COVID-19 Deluge, a Bankruptcy Tidal Wave?

ABI Bankruptcy Brief

September 24, 2020

ABI Bankruptcy Brief

Commentary: After the COVID-19 Deluge, a Bankruptcy Tidal Wave?

The number of people filing for bankruptcy could set records next year. And while bankruptcy reform artificially spurred the 2005 record of nearly 2.1 million cases filed, this peak will be all about the reality of a COVID-19-blasted economy, according to a Forbes commentary. So far, 2020 has avoided a surge of personal bankruptcies. In fact, total bankruptcy filings year to date trail the 2019 figures due to variables such as federal stimulus payments, mandated mortgage and other loan forbearance, unemployment insurance enhancement, and the additional support provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and other government programs. It may be because people are borrowing less. But whatever the cause of the decline, bankruptcies still seem likely to rise if unemployment and loss of income persist. There are at least two schools of thought about the future of bankruptcy, according to the commentary. One predicts a bankruptcy surge as filings mushroom quickly to record levels. Another more measured view that says a moderate and gradual increase in bankruptcies seems equally, if not more, likely. “All of us in the field are expecting bankruptcies to spike up dramatically, probably later this year and even more so into the New Year as the longer-lasting effects of the pandemic hit people in the wallet,” says Ike Shulman, bankruptcy lawyer and co-founder of the National Association of Consumer Bankruptcy Attorneys (NACBA). Uncertainty plays a bigger role in the expectations of some other observers of the bankruptcy scene. “Are bankruptcies going to increase? Probably,” said Prof. Robert Lawless of the University of Illinois College of Law. “But people need to be more modest about their predictions." Lawless says his research indicates that bankruptcy is tied to debt levels, not unemployment rates. “People like to talk about unemployment,” he says. “But if people don’t have debt, they don’t file for bankruptcy. It doesn’t put money in your bank account or food on the table or find you a job.”

'Fresh-Start' Accounting More Imperative for Struggling Companies During Pandemic

Coronavirus-induced chapter 11 filings are putting a spotlight on "fresh-start accounting" for increasing the chances of success for a company coming out of bankruptcy by reorganizing it into a new firm, or a new subsidiary of an existing firm, with a new set of books, reported. Although fresh-start accounting is designed to give investors more confidence in the long-term prospects for the emerging company, investors are likely to evaluate the financial statements coming out of the process themselves, said Jason Pizza, Grant Thornton Transaction Accounting Services National Lead Partner. The pandemic has shown that long-term outlooks can be quickly and unexpectedly squashed. "It's hard to do due diligence on the projections," said Robert Reilly of Willamette Management Associates, who has been doing bankruptcy valuations for 45 years. CFOs at companies considering buying an entity emerging from fresh-start accounting must watch out for a red flag, Reilly said. "If you are investing in one of these reorganized companies and you start seeing identifiable intangible assets or goodwill on the balance sheet, then you should be concerned," he said.

Another 870,000 Workers Filed for Jobless Benefits Last Week

Another 870,000 new applications for unemployment insurance were processed last week, a slight increase from the week before, as unemployment claims remain stubbornly high six months into the pandemic, the Washington Post reported. That figure is up slightly from the 866,000 applications processed the week before, according to the Department of Labor. Another 630,000 people had new claims processed for Pandemic Unemployment Assistance, the program for self-employed and gig workers, down from 675,000 the week before. The total number of people claiming unemployment insurance dropped to 26 million for the week ending Sept. 5 — a drop of more than 3.5 million. The new claim numbers have come down gradually from their peak in March but remain at historically high levels.

No Job, Loads of Debt: Covid Upends Middle-Class Family Finances

Millions of Americans have lost jobs during a pandemic that kept restaurants, shops and public institutions closed for months and hit the travel industry hard. While lower-wage workers have borne much of the brunt, the crisis is wreaking a particular kind of havoc on the debt-laden middle class, according to a Wall Street Journal analysis. Debt didn’t present a major problem before the coronavirus. The job market was booming, and median household incomes were rising, allowing families to keep up with payments. American families with nonhousing debt making over $98,018 a year in pre-tax income owed an average of nearly $92,000 of such debt in 2016. That’s up 32 percent from 2004, adjusted for inflation, according to an analysis of Federal Reserve data by the Employee Benefit Research Institute, a nonpartisan nonprofit research group. Before the pandemic, Americans had amassed $4.2 trillion in consumer debt, excluding mortgages, according to the Federal Reserve Bank of New York, a record even when adjusting for inflation. Housing debt added an additional $10 trillion to the tally. The coronavirus has spared few industries, and expanded unemployment benefits designed to replace the average American income didn’t cover all the lost pay of higher-earning workers, especially in or near expensive cities. The extra $600 weekly payments expired in July, putting them even further behind. Roughly six months into the pandemic, many lenders that let borrowers skip monthly payments now expect to get paid again. They have set aside billions of dollars to cover potential losses on soured consumer loans — an acknowledgment that America’s decade-long debt binge has come to an end. (Subscription required.)

Mnuchin Says He and Pelosi Have Agreed to Restart Stimulus Talks

Treasury Secretary Steven Mnuchin said Thursday that he and Speaker Nancy Pelosi (D-Calif.) have agreed to revive negotiations over a stalled follow-up coronavirus relief bill, The Hill reported. “I've probably spoken to Speaker Pelosi 15 or 20 times in the last few days on the CR,” Mnuchin told the Senate Banking Committee, referring to a continuing resolution to extend government funding, “and we've agreed to continue to have discussions about the CARES Act.” Mnuchin’s comments come amid a months-long partisan stalemate over a follow-up to the CARES Act, the $2.2 trillion coronavirus relief bill signed by President Trump in March. While there is broad bipartisan support for certain components of a stimulus bill, Democrats and Republicans remain deeply divided over the size and scope of another package. Spiking partisan tensions driven by the looming November elections and the battle over the Supreme Court vacancy left by the death of Justice Ruth Bader Ginsburg have also made a breakthrough unlikely before Election Day. Democrats have insisted that the federal government must approve trillions in further aid to renew a lapse in enhanced unemployment benefits, bolster state and local government budgets, send another round of direct relief payments to struggling households, and expand housing and eviction protections. Republicans, however, are wary of adding to the national debt and prefer a targeted package intended to help schools and daycare centers reopen and bring Americans back to work as quickly as possible.

In related news, Federal Reserve Chair Jerome Powell indicated that aid to small businesses and support for the unemployed should be prioritized if Congress were to reallocate money away from backstopping the central bank’s emergency-lending programs, Bloomberg News reported. Powell, responding during congressional testimony to a question from Sen. John Kennedy (R-La.), said an expansion of the Paycheck Protection Program and “something more” for Americans who have lost their jobs because of the coronavirus pandemic would have the greatest economic impact. Powell also estimated that the Main Street Lending Program could have $10 billion to $30 billion in loans outstanding by the end of the year. That underscores how the facility, unless significantly redesigned, won’t soon come close to the $600 billion capacity initially envisioned. Under the CARES Act, passed by Congress in March, U.S. lawmakers appropriated $454 billion to act as a buffer against losses for the Fed’s multiple emergency-lending programs. About $215 billion of that has been allocated to specific programs, like Main Street. More than $200 billion remains unallocated, and several of the programs appear no longer in need of backstops because of their success in calming short-term credit markets.

Pay Cuts Become Permanent for Many Americans Amid Pandemic

Pay cuts introduced by U.S. employers in the early days of the coronavirus pandemic — meant to stave off layoffs and retain key employees — have proven to be less temporary than perhaps originally envisioned, Bloomberg News reported. The majority of workers who took a pay reduction as the virus brought the economy to a halt are still earning less than they were prior to the outbreak, according to a Pew Research Center study released today. The extent of outright job losses brought on by efforts to contain the virus has been well-documented: Half of adults who say they lost a job due to the pandemic remain unemployed, according to the study, a finding consistent with government statistics showing that the U.S. has regained about half of the 22 million positions lost in the early spring. But shifts in earnings and pay structure have been harder to track, with average hourly wage data skewed higher by the disappearance of low-paid service-industry jobs and with overall income figures inflated by expanded government benefits that gave Americans a temporary boost. Nearly one-third of adults surveyed by researchers say either they or someone in their household had to reduce their hours or accept a pay cut because of the outbreak, with 21 percent saying that this happened to them personally. Among that subsegment of adults, 60 percent say they are currently earning less than before the outbreak, with 34 percent making about the same amount of money and 6 percent earning more than before the spread of the virus.

Networking Is a “Big Deal” at Insolvency 2020 Virtual Summit: Don’t Miss the Spontaneous and Impressive Networking Opportunities Via the Summit Portal!

In addition to insightful sessions, the Insolvency 2020 Virtual Summit portal presents attendees with convenient and powerful networking opportunities. While the schedule has plenty of scheduled networking events, attendees will be able to create spontaneous networking engagements simply by clicking on another attendee’s name in the virtual lobby. This impromptu meeting can be made public for other attendees to join, or private. Be sure to utilize the Insolvency 2020 Virtual Summit’s portal and impressive attendee list to help you find your next opportunity! Click below to learn more about how the Insolvency 2020 platform provides attendees with an enhanced networking experience:

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New on ABI’s Bankruptcy Blog Exchange: OCC Reports Surge in 'Seriously Delinquent' Mortgages

The agency reported signs of stress on the credit quality in residential loans serviced by seven large banks as a result of the COVID-19 pandemic, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

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