“A tidal wave of bankruptcies is coming.” That was the blaring headline from The New York Times in June of 2020. And it only stood to reason – with businesses shuddered and office parks looking like modern ghost towns, it seemed inevitable that bankruptcies across the country were headed for a steep spike. Surprisingly, however, it was actually the opposite that happened, according to Jialan Wang (left), assistant professor of finance at Gies College of Business. The surprising findings in her paper “Bankruptcy and the COVID-19 Crisis,” coauthored by Gies PhD student Jeyul Yang (below right), Benjamin Charles Iverson (Brigham Young University), and University of Illinois master’s alumnus Renhao Jiang (UC Santa Cruz), have intrigued economists across the country.

According to the study, while aggregate bankruptcy filing rates were similar to 2019 levels before the pandemic, filings by consumers and small businesses actually decreased starting in mid-March of 2020. And they didn’t just drop a little. Total bankruptcy filings dropped 31% year-over-year between 2019 and 2020. And while consumer and business Chapter 7 filings rebounded moderately starting in mid-April, they remained 20 to 30% lower than the previous year. Chapter 13 filings dropped even more dramatically, remaining 55-65% below 2019 levels through the end of 2020.

“We were all expecting an increase,” said Wang. So, when the numbers showed otherwise, the press beat a path to her door with The Wall Street Journal, The Washington Post, Bloomberg and other publications seeking answers.

The trend wasn’t universal. Business Chapter 11 filings increased by 40% year-over-year when including subsidiary filings, although they are down slightly when considering the number of parent company filings. So why didn’t consumer and small business filings follow suit? Was it federal actions like the suspension of evictions, home foreclosures and student-loan obligations? Or was it multiple rounds of government stimulus, including the $1.2 trillion Payment Protection Program that kept the situation at bay? These policies all played a role. But according to Wang, there were other factors at work.

“Large businesses have continued to see and received relief from the bankruptcy system as they would during a normal recession,” said Wang. “And relatively wealthy homeowners have, on average, benefitted from the fiscal stimulus and housing moratoria mandated by the CARES Act and other policies.” However, the study concluded, some non-homeowners and small businesses may face financial, physical, and technological barriers to accessing the bankruptcy system, especially in the areas hardest hit by unemployment during the early days of the pandemic.

The US economy’s trajectory in 2020 was certainly not that of a normal recession. For starters, the court system was just as impacted by the pandemic as the rest of the business world. Across the country, court buildings either closed or altered their procedures, making a difficult procedure more complex. According to Wang and her fellow researchers, approximately 55 of the 94 United States Bankruptcy Courts moved to telephonic hearings between March 13 and April 1 of 2020, with some shutting down physically or experiencing outbreaks.

These changes may have made it particularly difficult for recently furloughed, poorer, and rural filers to access the bankruptcy system. Shifting rules made it even more difficult to file without an attorney or internet access. Those who could hire an attorney were also met with steep fees. According to The Washington Post, paperwork mandated by the Bankruptcy Abuse Prevention and Consumer Protection Act caused the average cost of Chapter 7 bankruptcies to rise from $600 in 2004 to $1,000 by 2008, making filing more expensive.

Wang and coauthors also theorized that some may have put off filing, waiting to until the severity of the crisis was clearer because households can only file for Chapter 7 once every eight years. That would explain why stimulus efforts coincided with a rebound in consumer and business Chapter 7 filings.

Overall, the study concluded that, while much of the decline in filings could be attributed to the substantial federal, local, and private relief efforts, some households and businesses may have also faced barriers to accessing the bankruptcy system. This means that large businesses, homeowners, renters, and small businesses experienced very different effects of the crisis and disparate levels of relief from policy measures.

“When I started this project a year ago, I and most other experts feared a tidal wave of bankruptcies,” said Wang. While she’s glad that didn’t happen, she’s more excited to be part of a study that shows the role that public policy played in a crisis and can help economists better predict what to expect during a similar situation in the future. Let’s just hope that it’s not anytime soon.