Surprise drop in bankruptcies puts lawyers to the test

Economists believed that the economic crisis caused by the COVID-19 pandemic would lead to an increase in bankruptcy filings. Instead, they’ve plummeted, forcing bankruptcy practitioners across the state to cut costs or find other work to fill the void.

“The reduced numbers were a shock. Everyone’s numbers are down, and there’s not much you can do about it, ”said Mark Telloyan, assistant professor of law at Notre Dame Law School and associate at O’Brien & Telloyan.

In the 12 months ending March 31, 2021, bankruptcy filings fell 27.9% in Indiana and 38.1% nationally – a drop that occurred even as the unemployment was increasing. Indiana’s rate peaked at 17% last spring and has since fallen to 3.9%.

Ball State University economist Mike Hicks said he couldn’t explain the disconnect.

“Other than the really big stimulus checks and an extra $ 300 a week in an unemployment pandemic, there are few economic reasons why bankruptcies would have dropped,” said Hicks, director of the Center for Business and Economic Research at university.

“So it’s either that or a non-economic reason, such as the pandemic, that causes families to postpone big decisions like bankruptcy.”

What is happening?

Hicks said part of the explanation was the dramatic shift in US household consumption during the pandemic, including reduced travel, dining and entertainment costs.

Debtors have also been given leeway on many of their debts. For example, the United States Centers for Disease Control and Prevention has issued a moratorium on evictions, and the federal government has suspended student loan payments.

Banks have also been lenient with commercial customers, said John Allman of Hester Baker Krebs.

“Over the past year, I think the lack of deposits is really the result of the lack of pressure from banks and creditors. That’s what brings us customers, ”Allman said.

But Allman said he was convinced the banks would become more aggressive. And other lawyers say consumers will feel additional pressure after the CDC’s moratorium on evictions is lifted next month and the suspension of required student loan payments ends in September.

One in seven renters is behind on payments to their landlord, according to the Census Bureau’s Household Pulse Survey. The average amount owed is $ 3,400.

Lean times

If his former colleague had not retired when the pandemic began, Indianapolis bankruptcy attorney Jess Smith III said his company, Tom Scott & Associates PC, would have had to downsize significantly within months. following.

Even without his colleague, Smith had to go back to his roots in general medicine and tackle other issues, such as divorces, adoptions and wills.

“What I did was go back to things that I would normally have refused or sent back to others when we were inundated with bankruptcies,” Smith said. “Normally we fire them, but we’ve started dealing with these types of cases again at least until the bankruptcy filings resume.”

Even before the 2020 plunge in filings, bankruptcy lawyers had already felt the effects of fewer filings over the past decade. In 2010, in the wake of the great recession of 2008, cases peaked at 1.6 million nationwide. By comparison, 2019 saw only 773,361 cases, according to the U.S. Courts Administrative Office.

Then came the pandemic, which contributed to a 22% drop in Chapter 7 filings and 46% in Chapter 13 filings in 2020, compared to a year earlier, according to Epiq AACER. Chapter 11 business bankruptcies have increased by 29% but represent only a fraction of the total number of cases.

Smith said his law firm had been moderately affected by the drop in deposits. But it could have been much worse.

“We made the decision to close the third office when he retired. If we had not done so, there would have been a negative impact of trying to staff the overhead costs of the three offices with a reduced volume (of cases), ”he said.

Telloyan, Notre Dame’s assistant professor, said 2021 was shaping up to be even worse.

“In 2020, we filed half of the cases we normally do. Our revenue stream has been drastically reduced. It’s hard to keep everyone busy, ”Telloyan said of his business.

After the outbreak of the pandemic, South Bend’s attorney said his practice had gone from staffing two paralegals to one, with the last employee working fewer hours. With more free time Telloyan devoted more time to teaching.

Allman, who works primarily in the business bankruptcy arena, said his law firm had sensed new business stalled since last year.

“We were fortunate not to have had to (downsize), but I can understand that it’s happening there. Especially on the consumer side, ”Allman said. “I think consumer bankruptcies have dried up.”

Like others in the bankruptcy industry, Allman said he’s curious when deposits will resume.

“When is that going to change?” he said. “This is what we all ask.”

What’s to come?

Smith predicts a “gradual build-up” in cases, but not a surge.

“There will be pent-up demand for bankruptcy services simply because of depressed numbers over the past two years and the past year and a half,” he said.

Bose McKinney & Evans attorney James Carlberg, who represents business clients, said the economic recovery could save some struggling companies from having to file for bankruptcy.

“The real question will be what happens later this year, if things are a little more normal. Then the question will be: how do businesses operate and are they able to cope with the debt they have? ” he said.

Longtime bankruptcy attorney Mike Norris said he wasn’t too concerned about declining bankruptcy filings after practicing for more than 40 years.

“It’s just ebb and flow and quite frankly our society is burdened with so much debt that there will never be an end to bankruptcy filings or a permanent decline,” he said.

“I still expect a tsunami of deposits by the end of 2022,” Telloyan said. “Debt is a disease and we have a lot of sick people.” •