A new chapter in
bankruptcy: How the pandemic is influencing consumer and commercial bankruptcy
filings
By Ty Riha, Operations
Manager – Bankruptcy
Most would agree
that the COVID-19 Pandemic has affected all aspects of life and business this
year. The impact of the pandemic on consumer bankruptcy case filings has been
surprising to say the least. After the initial spread
of the virus triggered a rash of stay-at-home orders, consumer filings in April
dropped suddenly and sharply. In April, new consumer case filings dropped
39% from the prior month.[1] May and June
continued to see fewer consumer case filings as well, both months new consumer
case filings were down more than 30% from comparable 2019 rates.[2]
What does this
mean for healthcare organizations and why is it important to pay attention to
this issue? To start, high medical bills are the number
one cause for filing bankruptcy. Proactive
identification of these bankruptcy filings enhances compliance and patient
experience simultaneously.
Bankruptcy
itself is specifically excluded from 501r as it is the required path for
collections once filed, falling on the Provider to identify cases and present
claims as a requirement under 42 CFR 413.89 and the provider reimbursement
manual.
To put it in
perspective, let’s take a look at the underlying conditions that have
contributed to this situation.
The perfect
storm
This
surprising drop in bankruptcy filings comes amidst unemployment numbers that
have soared to heights unseen since the 1930s. As executive orders mandating social
distancing were implemented and businesses ranging from call centers and retail
outlets to restaurants and movie theaters closed, the nation’s unemployment
rate skyrocketed in April. While the Department of Labor has reported slightly
better numbers in May and June, initial unemployment filings are
still near historic highs, tallying a staggering one million new filings
per week.[3]
Given the high
unemployment rate and culture shock to everyday life that have occurred within
the past several months, what is slowing down consumer filings at this time? While
there is not one particular factor that can account for the decrease, there are several components that, when combined, may
help explain the temporary decrease over the past several months.
First,
even though many attorneys freely offer telephone consultations and courts are
amenable to electronic filings, stay-at-home orders, and the general
psychological impact brought about by the pandemic have led many consumers to stay
home and simply wait things out.
Second,
federal funds, such as the $2.2 trillion CARES Act stimulus package that has
provided consumers with a one-time payment and generous unemployment benefits,
have helped many consumers weather the initial economic brunt of the pandemic.
Third,
state court action that typically drive many consumers to file bankruptcy, such
as evictions, foreclosures, and garnishments, were temporarily suspended in
many states or, in states where courts remained open, filing parties were
simply unable to find process servers.
Finally,
temporary rules that stopped collection of student loans and some state-owed
debts provided additional breathing room for many consumers.
Together,
these extraordinary measures undertaken by Congress and individual states to safeguard
individuals throughout the severe economic shocks caused by the pandemic have delayed
consumer bankruptcy filings to date.
A new chapter
for small businesses
In contrast to
the early impacts to consumer filings, commercial Chapter 11 filings have
started to rise once again after a year of modest declines. Given the scope of
the stay home orders, it is not surprising that the travel, restaurant, and retail
industries have been hit the hardest. Hertz, Advantage Rent-A-Car, J.C. Penny,
J. Crew are but a few in the ever-growing list of affected companies that have
made news headlines for bankruptcy filings recently.
In addition to
the marquee Chapter 11 filings, there has been a sizable number of small businesses
who have been able to take advantage of the new Chapter 11 Subchapter V case option.
Introduced in February of 2020 by the Small Business Reorganization Act, it
allows small businesses the ability to reorganize under Chapter 11 without some
of the cost and time prohibitive provisions that have historically
disadvantaged smaller businesses. Over 500 Subchapter V cases have been filed
since its introduction and June alone saw 133 new cases filed. [4]
While Subchapter
V provided much needed relief, many commentators note that further reform to
help protect the viability of struggling small businesses is still warranted
and necessary. In a May letter to Congress, a group of prominent academics noted
that unless additional reforms beyond those already included in the CARES Act
are not swiftly implemented, that many otherwise viable small businesses may be
forced to liquidate.[5] This
would surely result in a large number of job losses negatively impacting employment
and damaging the economy with irreversible business closures. If businesses liquidate rather than restructure, the
ripple effect from those jobs which may no longer be available can certainly lead
to an increase in consumer filings.
However,
it is not only job losses due to business closures that may impact workers in
the near future. Many companies have laid off or furloughed a significant
number of employees over the previous months and they may find that they are
able to continue operations once they reopen with a much smaller workforce.
Writing
the next chapter
Significant
financial challenges continue to mount for both businesses and consumers amid
this crisis and bankruptcy remains an effective way to offer a financial respite
from the economic turmoil. As unemployment benefits and eviction suspensions
expire, it is expected that filings will once again begin to increase in the
future and there is a good chance that we may not see
COVID’s true impact to bankruptcy filings until late 2020 or into 2021.
Whether it turns
out to be a tsunami of bankruptcy filings as some predict or a more gradual
increase, having a robust bankruptcy solution in place to identify, segment,
and properly code accounts should be a top priority for every organization. Are
you prepared for pandemic-related bankruptcy filings? Fill out the form below
to learn how partnering with DCM Services drives higher performance at every
stage in the bankruptcy process.
[1]
American Bankruptcy Institute News Release dated May 5, 2020 available at: https://www.abi.org/newsroom/press-releases/total-april-bankruptcy-filings-fall-46-percent-over-last-year-commercial#:~:text=%E2%80%94%20Total%20U.S.%20bankruptcy%20filings%20in,April%202019%20total%20of%2071%2C303.
[2] Based on reviews of data complied by Epiq Systems available at: https://www.epiqglobal.com/en-us/experience/restructuring-bankruptcy/aacer-court-data-and-process-automation/services/bankruptcy-statistics-trends
[3] Department of Labor New Release, released July 9, 2020 available at: https://oui.doleta.gov/press/2020/070920.pdf
[4] Epiq
News Release dated July 3, 2020, available at: https://www.globenewswire.com/news-release/2020/07/03/2057391/0/en/Chapter-11-U-S-Commercial-Bankruptcies-up-43-in-June.html
[5] Letter from Brook Gotberg, Chair, Small Business Committee of the Bankruptcy & COVID-19 Working Group to Sens. McConnell and Schumer and Reps. Pelosi and McCarthy (May 26, 2020).