Pandemic Impression on Bankruptcy Filings and Auto Loans

When the novel coronavirus outbreak and COVID-19 pandemic hit the U.S., it took states a while to be ready to put on stay-at-home contracts and force shutdowns of non-essential businesses, let alone the ones Schools. But when the country was closed, it happened in an instant. From mid-March to the first week of June, more than 49 million people applied for unemployment benefits. The official unemployment rate in April was measured at 14.7% (source), which is well above the peak rate of 10% (source) that occurred during the great recession in 2008. What does all of this mean for bankruptcy filings and auto loans? This article explains the likely repercussions and your options if you are on the verge of bankruptcy in the months ahead.

Bankruptcy filings are a delayed economic indicator

Delay indicator for bankruptcy applications

At first glance, you might be surprised to find that bankruptcy filings have decreased in the first few months of the pandemic. In March 2020, there were a total of 62,861 bankruptcy filings (source) – this was the lowest number of bankruptcy filings in March in a whole decade (! But there were even fewer filings in April) registered just 38,425 new bankruptcy filings from consumers, a decrease of almost 39 % compared to the already low March value (source)! What is there? The answer, of course, is that economists refer to bankruptcy filings as a “lag indicator”. In other words, the effects of an economic downturn are not immediately seen in bankruptcy filings. In the year that the Great Recession 2007-2008 struck, bankruptcy filings rose in 2008 and subsequently increased significantly for two years (2009 and 2010). It wasn’t until 2011 that the submission rate began to decline. Because of this delay in filing for bankruptcy, we can assume we haven’t even seen the impact. It’s just too early.

The pandemic recession is different from previous recessions

The pandemic recession is different

However, the nature of the COVID-19 pandemic further complicates this lag time. It is possible that there would have been a surge in filings in April, but many of the bankruptcy courts were closed like everything else. Some allowed filings to be submitted electronically, but it still resulted in a severely limited ability to accept applications, not to mention all of the people who really can’t handle a technology-based approach.

In addition to the courts’ limited ability to accept and handle cases, there is another factor. Everyone notes how unprecedented this whole situation was in terms of the rapid shutdown of the economy and the great waves of job losses imminent. But it was also unprecedented how quickly and comprehensively the federal government acted to help people. In addition to sending relief checks directly to many people, unemployment benefits have been expanded both in terms of the amount people receive and the length of time they are used. Quite a few people currently earn more from unemployment than from their work. Indeed, with most people viewing bankruptcy as the absolute last resort, the government’s financial support can further delay the inevitable wave of bankruptcy filings that are sure to come. It could take a little longer to peak than in previous recessions.

Is there a tsunami of bankruptcy filings?

Tsunami bankruptcy filing

We definitely hope that there will be no tsunami of bankruptcy filings. Perhaps the federal government is distributing more aid to individuals. Perhaps it will also continue to expand unemployment benefits to help those in trouble. It may also provide additional help to companies in getting more people back to work. But that’s a lot of Maybes.

One of the strongest correlations is between job losses and bankruptcy filings. Unemployment peaked at 10% during the Great Recession (source) and we are well beyond that during the pandemic. Unemployment in April was 14.7% (source). Oddly enough, unemployment actually fell to 13.3% in May, when everyone expected it to rise even further (source). There are good reasons to question the accuracy of these numbers (see this CNN article if you want to dive into), but suffice it to say that some experts say the April unemployment rate is likely closer to 19.2% was and May was a little more in the sense of 16.1% (source). Anyway, unemployment is the worst since the Great Depression! As one reporter put it: “The rate and extent of loss cannot be compared. It is roughly twice what the nation did during the entire financial crisis from 2007 to 2009 ”(source). With that in mind, many think that the issue is not whether bankruptcy filings will go up, but when they will go up. Nevertheless, we can hope that it won’t be a tsunami.

The bankruptcy filing delay time will be longer than previous recessions due to the reasons stated earlier (government support and bankruptcy court closings), but there is one more that needs to be added to the mix. Another strong correlation with bankruptcy filings is the debt to income ratio of households. You may recall that the Great Recession was also known as the “Financial Crisis”. Too many people were quick and easy to play with consumer loans that should never have been approved (especially in the mortgage industry). Shortly before the crisis, the household debt ratio hit an all-time high of 1.24, while just before the pandemic it was just 0.95 (source). This means that many households, in general, were in a healthier financial situation that was in the current downturn. In other words, this is another factor that can add to the longer lag time in the increase in bankruptcy filings.

What To Do If You Need To Buy A Bankrupt Car?

need a bankrupt car

It will be months, and maybe even years, before we know how the number of bankruptcy filings can grow. When they stand up, many of them will be people who have never filed for bankruptcy before, including the first to see people experience because of the pandemic (e.g. filing claims for unemployment benefits). If they are like most people, they will wait as long as possible. They will struggle for weeks and even months until they finally reach the breaking point and decide that to submit. This whole process is going to leave you feeling frustrated and overwhelmed.

Now imagine all the people who are going to file for bankruptcy in the coming months only to find that they need to replace their car. This will add even more stress and anxiety to an already difficult situation. Many will go to one or more dealers or lenders to find that they are unwilling to do business with them due to their bankruptcy. Now you will feel downright desperate.

But it doesn’t have to be like that! At Day One Credit, we have built strong relationships with lenders willing to work with bankruptcy clients because we and they understand how bankruptcy is supposed to be a fresh start for a better financial future. If you are looking for a fresh start to the keys in the months to come, please know that Day One Credit is here to explain all of your options and to walk you through the process of finding a bankruptcy car loan for your specific situation. You can get answers to frequently asked questions and apply online now!

At Day One Credit, we are experts in finding the best possible bankruptcy loans to help our customers buy quality used cars. We are not lawyers, we do not give legal advice and nothing we say should be taken as legal advice. Your first step regarding bankruptcy should always be to seek advice from a qualified bankruptcy attorney.

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