The COVID-19 pandemic and the economic hardships it is causing will likely result in a wave of personal, farm and small-business bankruptcies in South Dakota and beyond in the coming months that will be both a result and a cause of a wider economic crisis spurred by the coronavirus.
So far, federal aid and unemployment programs, and several months of restricted access to the court system, have delayed a rise in bankruptcies from showing up in court filings.
But increased rates of unemployment, reduced incomes of people at all levels of the economy and a coming debt crisis will all play a role in the anticipated bankruptcy storm that could affect a wide range of individuals and businesses, including people who long saw themselves as financially stable, said Breck Miller, community relations director for Lutheran Social Services Center for Financial Resources in Sioux Falls.
It would not surprise me at all if we do see an increase in the number of bankruptcy filings, Miller said. The pandemic really put a lot of people in a financial bind, and I think its going to strike across the demographics. Its not just a low-income thing.
Federally backed financial assistance programs have helped keep food on many familys tables during the pandemic and have so far helped many of the hardest-hit South Dakotans stave off bankruptcy.
Mortgage forbearance, which allows for a delay or reduction in house payments, was granted as part of the federal CARES Act, and helped some homeowners manage debt. Temporary aid was also provided through new payment options from credit-card companies, and some borrowers were granted a pause in student loan payments.
But as federal assistance programs expire, and private lenders start seeking back payments on home and car loans, experts say many people in financially vulnerable positions will soon find that the debt they took on during the worst of the pandemic has become too much to handle.
Mortgage payments delayed through forbearance still must be paid, sometimes as soon as the forbearance period ends. A homeowner could be on the hook for hundreds or even thousands of dollars in back payments that must be made and carry the risk of defaulting on loans.
Back payments alone will drive more people to seek bankruptcy protections in the coming months, said Clair Gerry, a bankruptcy attorney from Sioux Falls.
For that reason alone I would expect to see a big uptick in Chapter 13s, Gerry said of the personal bankruptcy filings.
As of late July, 16,000 South Dakota residents were unemployed, and many were forced to turn to credit cards or drawing down savings to survive, Miller said. As of August, those unemployed workers lost the $600 weekly enhanced unemployment benefit created by Congress as part of its pandemic relief efforts.
A rising wave of bankruptcies could lengthen the pandemics economic recession as small businesses and consumers struggle to restructure their debts or sell off what they own or write off debts they cant pay. The burden has already been immense for many families at all income levels in South Dakota, many of whom have said they couldnt withstand an unexpected $400 expense without taking on more debt even before COVID-19 hit.
Consumer spending, meanwhile, is sure to fall and the economy overall will suffer, said Joe Mahon, an economist and outreach director at the Minneapolis Federal Reserve Bank.
Think of all those people who lost their jobs and lost their incomes, Mahon said. Even with the unemployment benefits that they might have been receiving, theyre probably thinking more about hanging on to their discretionary money rather than going out and spending on appliances and clothing and things like that.
If consumers are stuck paying off debts, they cant spend their money at local businesses, many of which also took on additional debt to survive the pandemic. That will result in fewer job openings for people trying to return to work as their unemployment runs out and the economy continues to open up.
Exactly when the bankruptcy bomb will go off is anybodys guess at this point, economists and bankruptcy experts say, but they worry it is only a matter of time before filings rise rapidly.
I just know theres a storm looming, Gerry said. Everybody is predicting that theres going to be a lot of bankruptcies filed by fall or winter.
So far, 2020 has been a relatively slow year for bankruptcy courts. Nationwide, total bankruptcy filings were down about 23% compared to the first six months of 2019. In South Dakota, by the end of July, bankruptcy filings were down about 16% compared to the first seven months of 2019, said South Dakota Bankruptcy Court clerk Frederick Entwistle.
Bankruptcy attorneys and financial counselors have recommended to clients that they hold off on filing for bankruptcy until the worst of their financial losses have ended. Often, that meant waiting until finding a job and figuring out what their new monthly income would be. If an individual files for bankruptcy but has to keep living off of credit cards or other forms of debt, any debt incurred after the initial filing wont be discharged or reorganized as part of the bankruptcy proceeding.
South Dakotans, in general, also tend to avoid bankruptcy. The state currently ranks 45th lowest in the per-capita rate of bankruptcy filings out of the 50 states and has had one of the lowest per-capita bankruptcy filing rates for more than a decade. Over the past five years, there have been fewer than 1,100 personal bankruptcies filed in the state each year. In 2019, just 964 people or married couples filed for either chapter 7 or chapter 13 bankruptcy.
Recessions, though, tend to push people beyond their financial limits faster and farther than they can cope with. In 2010, when the effects of the Great Recession of 2008 peaked in South Dakota, 2,000 people filed for bankruptcy protection, nearly double the number from before the Great Recession began.
COVID-19 also came at a time when farmers and ranchers, South Dakotas economic bedrock, were struggling against a trade war and low prices for grain, soybeans and cattle. In fact, January and February of 2020 saw overall bankruptcy filings in South Dakota increase over the same period in 2019 due to a jump in farm bankruptcies, said Gerry.
Much of what happens over the next few months will depend on what Congress comes up with as far as economic stimulus, and how long it takes those currently unemployed to get back to work. Avoiding a surge in bankruptcies, though, will take a lot more stimulus and far faster employment and wage growth than is likely to occur.
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