Despite the frustrating economic times, a lot of people are confused about the fact that Bankruptcy filings seemed to have declined.
There are a myriad of factors on why this is happening, but the phenomenon is important for a whole host of industries which depend on the strength of the economy. Jobs ranging from car sales to real estate are affected by which direction the economy is going and the overall rate of Bankruptcy filing. Right now, many people are unsure about whether to switch their business practices to a model that focuses on a retracting economy, or whether they should continue to focus on models related to a strong economy.
For example, many car salesmen have noticed that sales are still strong, but this is largely due to the fact that supply has been diminished, so people who are in the market are more motivated to buy. Similarly, real estate sales are still strong and there has been no substantial reduction in the value of homes, despite the major job losses nationwide. Realtors who call me are trying to gauge the market so they can decide if they are going to switch to short sales and foreclosed properties if Bankruptcies will be on the rise, but the current trend is admittedly confusing.
One would think that with the massive blow to the economy due to the Covid-19 crisis, Bankruptcy filings would be on the rise. It is entirely possible that this may be on the horizon, but for the moment, there are a number of factors that are keeping Bankruptcy filings low.
One of the myths about Bankruptcy is that only people who are financially destitute file for Bankruptcy. The truth is that people who truly have no money also have no assets worth collecting against so they are poor targets for creditors and collections. Because of that there is no serious motivation for filing for Bankruptcy when the person simply has nothing to lose. Furthermore, the irony of Bankruptcy is that it does cost money to file a Bankruptcy case, so Bankruptcy relief is most appropriate for people who have some assets and resources, but are simply unable to make a meaningful reduction in debt with their disposable income. These people have something to lose and need Bankruptcy protection to keep what they have.
Another factor is that right now there are several artificial factors stimulating the economy. The Federal stimulus package as well as unemployment assistance has helped to bridge the gap for many people. Also, many people are opting to cash out 401(k) and other retirement plans for jobs that they have lost. If you plan to file for Bankruptcy, then cashing out a retirement plan is probably a mistake, but most people will not discover that fact until they have already cashed in the 401(k) and met with a Bankruptcy attorney.
These limited infusions of money into family budgets assist people in forestalling the Bankruptcy option. The problem is that these are very temporary forms of relief, but since most people want to avoid filing for Bankruptcy relief at all costs, any hope in the form of outside income sources is really illusory and not a concrete financial plan.
Another odd factor is the fact that (at the time of this writing) we are in the middle of the Summer and oddly enough good weather can actually lift people’s spirits. The fact that we can spend time outside with our families without it costing any money causes people to temporarily forget about their looming financial problems. This has been a consistent trend for decades where Bankruptcy filings generally drop in the warmer months and pick up during the Winter months.
All of these factors combine to create an odd situation whereby the economy has taken an unbelievable hit, but Bankruptcy filings actually have dropped. Most Bankruptcy practitioners are predicting that by the Winter time things will change course and Bankruptcy filings will significantly pick up. As a result, there are a number of factors that you should keep in mind.
If you are not contemplating Bankruptcy, but you work in an industry that is affected by the strength of the economy, you should start to plan for increased Bankruptcy filings in the next 6-12 months. That means that the sales industry will be affected, as well as any industry that is perceived as a luxury. I wouldn’t look to opening a dry-cleaners, or a high-end restaurant, but there are a lot of industries that will grow as Bankruptcy filings increase. For example, property management companies will do really well as people start to move from houses to apartments.
For people who are contemplating Bankruptcy, even if you do not think that you need to file now, this is a great time to reach out to a Bankruptcy attorney and get as much information as possible. For example, as stated earlier, a common mistake would be to cash in a retirement plan. A qualified and experienced Bankruptcy attorney would be able to advise you as to whether this is a good idea or not. Similarly, some people are making other classic mistakes, such as drawing out equity from their home, paying back relatives for old loans, or charging on credit cards for living expenses. The best way to avoid making these mistakes is to sit down with a Bankruptcy attorney and go over your financial condition, and ask your attorney about financial transactions that you are contemplating to determine what the best financial plan would be.
Despite the slowdown in Bankruptcy filings, unless there is a serious V-shaped recovery (which does not look likely at this point), all indicators are that Bankruptcy filings will take a sharp upturn as the Winter approaches, and everybody who may be affected by the economy (whether you plan to file or not) should plan accordingly.