Why big wave of pandemic bankruptcies never happened
The pandemic produced the kind of fallout that gives economists nightmares. An initial drop in economic output that exceeded the Great Depression. Sudden job losses that outpaced modern records.
But there's one economic bellwether that has seemingly painted an even rosy picture: bankruptcies, which have so far lagged behind their total in the year before the pandemic.
Yes, the number of personal and business bankruptcies filed last year in the country fell by nearly 30% from 2019 despite COVID-19. The decline was largely driven by a roughly 31% fall in personal bankruptcies but also a nearly 5% slide in filings due to business debts, according to U.S. Bankruptcy Court statistics. The court's Central District of California — which includes Los Angeles, Orange and five other counties — has been no exception, experiencing a 27% decline in all cases, including a 15% decline in business-related filings.
Filings are still down so far this year, and to get an understanding of how that might be possible consider two restaurants that closed after the pandemic hit: the popular Souplantation buffet chain and Olive Tree Restaurant, a stand-alone Middle Eastern eatery in Anaheim, Calif.
With more than 4,000 employees and 97 restaurants operating under two names in 10 states, Souplantation's parent, Garden Fresh Restaurant Corp., decided to file for federal bankruptcy protection, selling off its assets and handling its creditors in court.
The owner of Olive Tree, however, simply worked out a deal with his landlord to get out of his lease and shut the doors of the restaurant. He figures he could've sold the eatery for $500,000 in normal times.
"I left that on the table. I don't have any debt, but I have nothing," former owner Alan Abdo said. "This coronavirus thing changed the world."
The different outcomes are hardly atypical: Big companies that died have tended to go to Bankruptcy Court, while an unknown number of smaller businesses simply shut down.
Business filings would have been even lower if not for a rise in Chapter 11 cases, which allow companies to reorganize. And many of those cases were filed in a handful of courts favored by large corporations with complicated businesses that required separate filings for individual subsidiaries. Two-thirds of U.S. Bankruptcy Court districts saw no increase in Chapter 11 filings.
The biggest bankruptcy last year was Hertz, which had amassed some $23 billion in debt after business and personal travel screeched to a halt early on in the pandemic. Other notable bankruptcies included retailers J.C. Penney and Neiman Marcus — two retailers already struggling because of online rivals — and Chesapeake Energy, a victim of depressed demand for oil and gas.
There was one record set last year, which was by the 62 public and private companies that had assets of $1 billion or more before filing for bankruptcy. That topped the 58 in 2009, according to New Generation Research, a Boston firm that operates the BankruptcyData website.
However, a broader measure of corporate distress was less dire: There were only 110 publicly traded companies — including smaller ones not traded on major exchanges — that filed for bankruptcy. That was more than the 64 in 2019 but well under the 211 in 2009 amid the Great Recession or the 263 in 2001 after the tech bust, the BankruptcyData numbers show.
"For a while, I was very convinced that (filings) were going to pop down the line, but 12 months into this they haven't," said Ed Flynn, a consultant with the American Bankruptcy Institute, who notes national filings were still down in the middle of March by some 45% compared with the same period last year when the pandemic-related shutdowns started.
"They are down to levels we haven't seen since the mid-1980s," he said.
There are some obvious reasons that help explain the counterintuitive trend, especially the deluge of cash the U.S. government has pumped into the economy to help keep entire industries and businesses afloat — and put money directly into consumers' pockets through higher unemployment benefits, as well as stimulus checks showered on even middleclass families, including the $1,400 that landed this month. Other measures to protect individuals from the pandemic turmoil also have probably lowered the rate of personal bankruptcies, including eviction bans, foreclosure moratoriums and federal studentloan payment freezes — which were extended by the Biden administration but are still set to expire this year.
"Clearly people, mainly through government actions, have not yet felt the pain, and have not had the type of event that would precipitate a bankruptcy. They may not be paying their rent or their mortgage, but they are not being foreclosed on yet," Flynn said.
And for those debts not subject to any governmental restraint on collections there have been practical considerations, including a pandemic-related backlog in California state courts that have made it challenging for creditors to get judgments, L.A.-area bankruptcy attorneys say.
Unless debtors are facing an immediate threat — such as a seizure of assets or garnishment of a wage — they will often avoid bankruptcy, which is costly and time-consuming in itself.
"It's a trustee looking into every transaction in your economic sock drawer. It's just not a pleasant or good thing," said L.A. bankruptcy attorney J. Scott Bovitz. "Individuals don't tend to file bankruptcy unless they really, really need to. As long as there are a couple of dollars coming in the door from somewhere they tend to put it off."