The line of sight on consumer credit risk are clouded with millions of payment deferrals, stimulus checks that often paid consumers more than they earned, and an uncertain horizon. Right now, two facts that we know are:
- Write-offs are stable at top issuers through the third quarter, at 3.8% in 2Q20, only 17 basis points worse than 1Q20
- Write-offs for smaller issuers have begun to boil, rising to 7.99% in 2Q20 from 7.46% in 1Q20
As bankers brace for increased losses into early 2021, bankrupt attorneys are beginning to swarm in anticipation of increased volume. While business bankruptcies, ranging from Lord and Taylors to Sizzler Steakhouse, are common, consumer bankruptcies have not seen a surge.
Forbes covers this issue in today’s read. The article, titled “After the Covid-19 Deluge, A Bankruptcy Tidal Wave?”, suggests that lawyers are now ramping up for incremental consumer bankruptcies.
- “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, a bankruptcy lawyer and co-founder of the National Association of Consumer Bankruptcy Attorneys (NACBA), a Washington, D.C.-based professional group.
- While the bankruptcy business has seen sharp increases in demand in the past—more on that in a moment—there is something different this time. “What we see with Covid-19 is that there are so many people that never dreamed they’d be talking to a bankruptcy lawyer or having to file bankruptcy. That wasn’t in their wildest dreams,” Shulman says.
We all know that the COVID recession is different than the Great Recession. The COVID recession came out of nowhere and affected everyone. Credit card metrics looked wonderful at year-end 2019, then came the virus. In 2019, bankruptcies were less than 1 million, a pittance compared to the 2010 peak of 1,600,000 bankrupt consumers.
The American Bankruptcy Institute, a trade group, tracks filing as well.
- The ABI has also released a forecast: Chapter 11 filings by businesses will likely rise sharply—several large corporations have already sought Chapter 11 reorganization—and may conceivably best the 1986 record for filings under that chapter, the organization says.
- However, Chapter 13 filings, which are often submitted by individuals with stable incomes and good prospects for eventually repaying creditors, will likely decrease in favor of Chapter 7 filings that don’t call for borrowers to repay debts. Overall, if the economy doesn’t recover and unemployment persists, bankruptcy records may be set in 2021, the organization forecasts.
The challenge is unemployment. People do not want to file, but there are often no options.
- All this leaves us in what is, in 2020, a familiar place: with an ominous feeling but a lack of clarity about what exactly it portends. With considerable logic and evidence to back him up, Shulman has little doubt that the not-too-distant future will feature more bankruptcy filings than we’ve seen in a long time, if not ever. “All these things haven’t hit the fan yet, but it’s coming,” he promises.
The stigma of bankruptcy usually helps forestall the process, but this time things are different. One way or another, we are all in the same boat. What the world needs now is a practical, universally available, cost-effective vaccine.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
