Idaho bankruptcy rates are down. A lot. But things may not be what they seem.
Federal COVID aid, low interest rates, pause on student loans may have helped people avoid bankruptcy during pandemic
The James A. McClure Federal Building in Boise is the largest of Idaho’s federal courthouses. (Otto Kitsinger for Idaho Capital Sun)
When the pandemic arrived — prompting mass layoffs and short-lived restrictions on business activity — Idaho’s bankruptcy lawyers were told to expect the worst.
“We were preparing for a tsunami of case filings” in the spring of 2020, said Stephen W. Kenyon, clerk of the U.S. District and Bankruptcy Courts for the District of Idaho.
The federal courts that handle bankruptcies were told “that we were just going to get slammed,” he said. “We were all prepared for that, but it never happened.”
Instead, the spring of 2020 — and every season since then — brought Idaho a steep drop in the number of people and businesses seeking bankruptcy because they could no longer pay their debts.
Idaho’s economy had already supported the steady decline and flattening of bankruptcy filings since 2011. That turned into a steep drop during the pandemic — going from 3,667 bankruptcies filed in 2019 to 2,001 last year.
“That’s the million-dollar question everybody is asking,” Kenyon said.
“It’s a head scratcher, because with rents just skyrocketing, the amount of disposable income people have is dropping significantly,” he said. “So, you would think bankruptcies would correspond, but they’re not.”
Bankruptcy attorneys and national reports speculate that COVID-19 related pandemic assistance had something to do with it.
While many Idahoans lost their jobs in mass layoffs in spring 2020, the economy more than rebounded. The state’s unemployment rate has continued to break records, dropping to just 2.6% in April.
Idaho workers, households and business owners received federal assistance through stimulus checks, enhanced unemployment, the Paycheck Protection Program’s forgivable loans, a pause on federal student loan repayments and other programs.
The surge in housing prices in the past two years made life much harder for some Idahoans. But for others, a 20% increase in property value meant they could use equity from their homes to pay for large expenses that might otherwise have pushed them toward bankruptcy.
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What is pushing Idahoans to file for bankruptcy now?
If the trend continues, Idaho will record only about 1,440 bankruptcies this year, according to Kenyon and data from the federal court system.
If the economy is doing so well, what is driving those 1,440 people or businesses into bankruptcy court?
Paul N. J. Ross, who practices bankruptcy law at Idaho Bankruptcy Law in the Magic Valley, said that, in his experience, it’s a matter of survival.
“There’s not a lot of people filing bankruptcy right now, unless they’re forced into it,” he said.
“Unfortunately, I’m seeing a lot of older people who are on Social Security or on very limited retirement, and they have no other way to make ends meet, so they’re trying to wipe out credit card debt or other debts that are haunting them,” he said.
When an older married couple is living on Social Security, and one of them dies, the survivor’s income takes a hit, Ross said.
That often means the loss of any extra money the couple had put toward credit card debt, or fixing a roof, or a plumbing repair. That’s especially true now, because of inflation, he said.
One of his recent clients was a woman who needed to have the siding on her house redone. When the bill arrived, it was much more expensive than what she’d been quoted, he said. She also had medical and credit card debt, he said.
Another client during the pandemic was a small business — a landscaping company — that was forced into bankruptcy by COVID-19 itself. Owners and employees came down with COVID-19, it disrupted their business operations, and it “sort of knocked them out,” Ross said. The company took out “business payday loans” and couldn’t make payments, so that debt snowballed, he said.
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Harsh reality: The good bankruptcy news can’t go on forever
The low bankruptcy numbers are a welcome statistic. But Ross and others predict it won’t continue much longer.
Ross said he’s noticing foreclosures have begun to slowly tick back up, for example.
The latest U.S. Census Bureau household survey on financial stress found that more than a third of Americans are struggling to pay bills, “showing how much of a toll the surge in consumer prices has taken on budgets,” Bloomberg News reported Friday. “The share of respondents saying it has been somewhat or very difficult to pay for usual household expenses is now near its 2020 peak, at the worst of the COVID-19 pandemic.”
As an attorney who takes on complex bankruptcy cases at Johnson May Law in Boise, Matthew T. Christensen was surprised by the drop in bankruptcies since 2020.
His usual cases were businesses struggling to repay a loan, or making an investment that didn’t pan out. More recently, clients are filing for bankruptcy not because they can’t pay off their debts but because of some kind of litigation — a lawsuit with a business partner or customer, for example.
“I think recently, up until just recently, the economy was doing really well — the government was giving out all kinds of (financial aid), people were getting paid more at their jobs because there was a shortage of workers … interest rates were low,” he said. That allowed people to continue paying their bills, and kept the economy humming along, he said.
But, he added: “I think the consensus in the bankruptcy world is: all those things are done.”
Pandemic funds have largely stopped flowing, and now interest rates are on their way back up.
Bankruptcy experts keep their eye on a couple of leading indicators of financial stress that lead to bankruptcy: default rates on credit cards and student loans.
Federal student loan payments are still on pause, as the Biden administration extended that pandemic-related student loan relief mechanism that was put in place by the Trump administration.
But credit card bills? They’re coming due. And people have begun to have trouble paying them.
“As the default rates go up, a little bit of time later you’ll see the bankruptcy numbers go up,” Christensen said. “In the last couple of months, you’ve seen an increase in credit card default rates.”
Don’t wait to consider bankruptcy, attorney says
Matthew T. Christensen of Johnson May Law says business owners often wait too long to consider bankruptcy, because of a stigma attached to it. Federal bankruptcy law offers a few different kinds of bankruptcy to individuals and businesses. But options are limited if people delay the bankruptcy process, hoping things will turn around, he said.
“If you wait too long, it’s not going to be successful,” Christensen said. “As soon as it’s looking like there’s no more (pandemic aid) out there, payroll is starting to go up” and money is starting to get tight, “that’s the time when all of the options should be looked at.”
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