Bankruptcy Courts Ill-Prepared For Tsunami Of People Going Broke From Coronavirus Shutdown

Written by Paige Marta Skiba, Vanderbilt University; Dalié Jiménez, University of California, Irvine; Michelle McKinnon Miller, Loyola Marymount University; Pamela Foohey, Indiana University, and Sara Sternberg Greene, Duke University


As more Americans lose all or part of their incomes and struggle with mounting debts, another crisis looms: a wave of personal bankruptcies.

Bankruptcy can discharge or erase many types of debts and stop foreclosures, repossessions and wage garnishments. But our research shows the bankruptcy system is difficult to navigate even in normal times, particularly for minorities, the elderly and those in rural areas.

COVID-19 is exacerbating the existing challenges of accessing bankruptcy at a time when these vulnerable groups – who are bearing the brunt of both the economic and health impact of the coronavirus pandemic – may need its protections the most.

If Americans think about turning to bankruptcy for help, they will likely find a system that is ill-prepared for their arrival.

It’s a hard road

There are many benefits to filing bankruptcy.

For example, it can allow households to avoid home foreclosure, evictions and car repossession. The “automatic stay” triggered at the start of the process immediately halts all debt collection efforts, garnishments and property seizures. And the process ends with a discharge of most unsecured debts, which sets people on a course to regain some financial stability.

The process helps the average household erase approximately US$50,000 in unsecured debt – such as payday loans and credit card and medical bills.

We know from our empirical research, however, that filing for bankruptcy comes with costs. In a Chapter 7 case, known as a liquidation when a debtor’s property is sold and distributed to creditors, households may be required to surrender some of their assets. The post-bankruptcy path to financial stability is often bumpy.

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