Americans households are about to get hit by a devastating wave of bankruptcies

Unemployment is soaring due to the coronavirus pandemic and a wave of consumer bankruptcies is almost guaranteed to follow.
But there are ways that lenders and Congress can help lessen the pain from this bankruptcy wave.
Sushrut Jain is an economist at Edgeworth Analytics. Dr. George Korenko is an economic expert witness at Edgeworth Analytics.

The US has been hit by an unprecedented wave of unemployment since the start of the coronavirus pandemic. Nearly 39 million Americans have filed new unemployment claims and the unemployment rate has hit a staggering 14.7%.

This crisis, however, has yet to roll over into a second wave of consumer bankruptcy filings, with fewer than 40,000 reported in April – a ten-year low for the month.

While businesses and individuals can declare bankruptcy, individuals make up the vast majority of filings. Due to the high correlation between unemployment and consumer bankruptcy, a surge of filings can be expected in the coming weeks.

This will likely result in the contraction of the credit industry, with the most in-need borrowers potentially finding it more difficult to access credit. The magnitude of this bankruptcy wave, however, will be determined by three factors: the amount US households owe divided by the amount they earn, the impact of Congress’ attempts to rescue the economy, and what creditors do from here.

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Two indicators of bankruptcy
Studies reveal Americans typically file for bankruptcy after costly economic events, like job loss, divorce, illness, or injury. Depending on the study, between 33% and 66% of bankruptcy filers cite job loss as the cause.

Per data from the Bureau of Labor Statistics and American Bankruptcy Institute, there is a near-perfect correlation between the quarterly individual bankruptcy and unemployment rates since 2006. Considering the current drastic unemployment spike, a bankruptcy surge is almost certain to follow.

A high aggregate household debt-to-income ratio can also indicate future bankruptcy filings. Household debt can include mortgages, credit cards, and auto and student loans. In 2007, just before the Great Recession, the aggregate household debt-to-income ratio peaked at 1.24, meaning on average, households had nearly 25%more debt than income. Today, that number is a much healthier 0.95, which should ease the severity of the bankruptcy crisis.

www.businessinsider.com/american-households-about-to-get-hit-by-wave-of-bankruptcies-2020-5