PROVIDENCE — Amid the pandemic, bankruptcy filings reached a level not seen in Rhode Island in at least three decades. But it was not a record high, as might be expected. Rather, bankruptcies plunged to a low point.
In 2020, the US Bankruptcy Court for the District of Rhode Island received 1,414 bankruptcy filings – a 31-percent decrease from the 2,038 filings in the previous year and the fewest filings recorded in Rhode Island since at least 1989, according to court records.
“We have not had that low a caseload in decades,” Clerk of Court Susan M. Thurston said. “It’s contrary to what you would expect.”
Thurston explained that bankruptcy filings were down in 2020 in part because the government imposed moratoriums aimed at protecting the finances of individuals and businesses amid the COVID-19 pandemic. “So even though a lot of people have lost their jobs, there have been executive orders that put in place moratoriums on evictions and foreclosures,” she said.
Also, Thurston said that bankruptcy tends to be a “lagging indicator” – meaning that while the economic devastation wrought by the pandemic isn’t reflected in the 2020 figures, it could generate a wave of future bankruptcy filings.
Bankruptcy court tends to be a place of last resort, Thurston said. “People come here the day their foreclosure is going to occur – not six months before,” she said. “They try to do everything they can to manage their financial situation before they file for bankruptcy.”
The moratoriums will keep creditors from pursuing evictions or foreclosures, but once employment levels rise and the moratoriums are lifted, the number of bankruptcy filings could very well rise, Thurston said.
“The cases are being delayed because creditors are not pursuing collection,” she said. “But when the economy starts to get better and people say ‘I have a job, I can support myself,’ that is when they file for personal bankruptcy so they can discharge debt.”
Within hours of his inauguration last week, President Joe Biden signed a series of executive orders, including one that extends a federal moratorium on evictions. He also asked federal agencies to prolong a moratorium on foreclosures on federally guaranteed mortgages. The extensions run through at least the end of March.
Biden also moved to continue a pause on federal student loan interest and principal payments through the end of September, while progressive groups and some congressional Democrats are pushing him to go further by canceling up to $50,000 in student debt per person.
Thurston said the vast majority of the bankruptcy filings in Rhode Island come from individual consumers rather than corporations. In 2020, businesses accounted for 2 percent of the filings, while consumers accounted for 98 percent.
The 31 business filings in 2020 represented less than half of the 64 business filings during the previous year.
Thurston said some businesses don’t bother filing for bankruptcy. “They just close their doors and leave,” she said. Rhode Island has a “robust” state court receivership process, so some businesses choose that over filing in US Bankruptcy Court, she said. Also, some larger companies choose to file for bankruptcy in districts such as Delaware, Manhattan, or Chicago, she said.
Last year’s bankruptcy filings in Rhode Island peaked at 186 in March, when the pandemic hit. The state saw just 94 filings in April, and December had the fewest filings, at 88.
Bryant University economics Professor Edinaldo Tebaldi attributed the low level of bankruptcy filings in 2020 in part to a K-shaped recovery, in which some parts of the economy are bouncing back while others continue to struggle.
In general, more highly educated, highly skilled workers have managed to hold onto their jobs, often working from home, so they are not likely to be filing for bankruptcy, he said. Meanwhile, the pandemic has taken a higher toll on those with less education, especially in sectors such as leisure and hospitality, but those residents are also less likely to be homeowners or have other sources of significant debt that could trigger a bankruptcy filing, he said.
Another factor, Tebaldi said, is that the government has placed moratoriums in areas such as evictions and student loan debt. “That is a big relief to many consumers – not having to pay $500 or $1,000 per month in student debt,” he said.
But if those moratoriums expire and the economy fails to fully reopen, the number of bankruptcy filings could quickly spike, Tebaldi said.
He said he expects economic conditions in Rhode Island to remain “challenging” during the first half of 2021. “We don’t have the vaccine supply to be able to get the vast majority of the population immunized,” he said.
The second half of the year “may be pretty good in terms of job creation and income creation,” assuming the economy does fully reopen by then, Tebaldi said. But some businesses that closed during the pandemic will never reopen, and it will take at least a couple of years before employment levels return to pre-pandemic levels, he said.
Thurston said that when the economy does bounce back, the unexpected will happen once again: Amid signs of recovery, bankruptcy filings are likely to shoot up.
“At some point, we expect the tide to turn and the bankruptcies to start rising,” she said. “Some articles say a tsunami of bankruptcies is coming, but no one has a crystal ball to say when. My gut says it’s not going to start until the moratoriums expire and jobs return” – likely in the second half of 2021.