A New Chapter in Bankruptcy: The Surprising Ways COVID-19 Has Impacted Bankruptcy

Photo by Melinda Gimpel on Unsplash

Margot Tierney, Associate Member, University of Cincinnati Law Review

I. Introduction

In March 2020, the entire world came to an abrupt stop as the COVID-19 pandemic forced the globe into their homes and out of the workplace. Instantly, the world began to speculate about how the pandemic would impact their lives socially, mentally, and economically. Because a significant number of Americans faced temporary layoffs and terminations from their jobs due to the pandemic, many feared that they may have to declare bankruptcy.[1] Surprisingly, there has been a drop off in the number of bankruptcies declared during the pandemic years compared to non-pandemic years.[2] Governmental relief plans, provided both to individuals as well as to businesses, have allowed these entities and individuals to keep their heads above water during times of financial difficulty.

II. Background

A. Types of Bankruptcy

There are six types, or “chapters,” of bankruptcy under the United States Bankruptcy Code; however, the three most common types of bankruptcy are chapter seven, chapter eleven, and chapter thirteen.[3] A chapter seven bankruptcy is the primal form of bankruptcy in which non-exempt assets[4] of the debtor are liquidated in order to satisfy the debt owed to creditors.[5] While chapter seven bankruptcy can be employed by both individuals and businesses, “an individual chapter seven bankruptcy is one of the most common civil proceedings in the United States.”[6] Following the commencement of a chapter seven bankruptcy, the individual debtor receives a “fresh start,” where the debtor is able to restart his or her financial life following bankruptcy.[7]

A chapter thirteen bankruptcy, on the other hand, functions as an alternative to a chapter seven bankruptcy for individual debtors. The central difference between a chapter seven and a chapter thirteen bankruptcy is that the debtor in a chapter thirteen case is able to retain the assets which would otherwise be sold or liquidated in a chapter seven bankruptcy.[8] Rather than liquidate their assets, the debtor pledges payment out of their income to go to their creditors for an agreed upon period, typically three to five years.[9] Upon completion of this plan, the debtor is discharged.[10]

A chapter eleven bankruptcy functions similarly to a chapter thirteen bankruptcy, but a chapter eleven bankruptcy functions for businesses to reorganize and restructure their debts. A typical chapter eleven case involves “negotiating and confirming a plan of reorganization to keep the company operating.”[11] During a chapter eleven bankruptcy, a business can remain open and continue operating in order to generate income to pay off debts.[12] Notable businesses that have declared chapter eleven bankruptcy include General Motor, K-Mart, and United Airlines.[13]


In the wake of COVID-19, the government, both at federal and local levels, constructed different programs in an attempt to benefit individuals and businesses that have suffered financial hardships and losses as a result of the pandemic. The biggest and most effective government program in preventing bankruptcy during the recent pandemic is the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).[14]

The CARES Act is a bill passed to provide economic stimulus and financial safeguards to those who suffered financially as a result of the COVID-19 pandemic.[15] The main groups that the Act aimed to protect are individuals and families, small businesses, local governments and American industries.[16] In protecting businesses, the CARES Act allocated $500 billion to the “Main Street Lending Program” to support small and medium sized businesses that were in stable economic conditions prior to the pandemic.[17] Additionally, the CARES Act dedicated $669 billion towards the Paycheck Protection Program (PPP) which aimed to protect small businesses by ensuring they could maintain their employees and cover certain overhead costs.[18] While businesses were able to receive loans from the government through the CARES Act, the CARES act also provided numerous tax breaks for businesses as well, allowing these businesses to keep money in their pockets.[19]

The CARES Act also has provisions in place to protect consumers and individuals during the COVID-19 pandemic. Most notably, the CARES Act provided periodic stimulus checks to independents, couples, and families who filed a tax return.[20] The CARES Act also helped students and recent graduates by halting payments of student loans as well as accrual of interest on those loans.[21] Students were also entitled to cash grants through the higher education emergency relief fund and were given increased flexibility with their federal student financial aid applications.[22] Other safeguards the CARES Act provided to individuals and families related to mortgages and evictions. For homeowners with federally-backed mortgages, the homeowner was protected from foreclosure and could also request a mortgage forbearance for up to 180 days.[23]

III. Discussion

As a result of the CARES Act, individuals and businesses were provided with economic relief, which in turn, led to a decrease in the number of bankruptcies as compared to prior, non-pandemic years. Compared to the last non-pandemic year on record, 2019, the number of bankruptcies has fallen significantly for both businesses and individual consumers.[24] In 2019, 7,020 businesses declared chapter eleven bankruptcy while in 2021, only 4,836 businesses declared bankruptcy.[25] Similarly, 480,206 individuals filed for chapter seven bankruptcy in 2019 compared to 288,327 individuals who filed in 2021.[26] It is apparent that the stimulus provided to both consumers and businesses through the CARES Act contributed to this decrease in bankruptcy declarations.

Businesses at the beginning of the COVID-19 pandemic experienced, on average, a fifty-two percent decrease in revenue.[27] In typical years, when a business experiences such drastic losses in revenue and employees, the business often finds itself facing bankruptcy, and in many cases, declaring bankruptcy. However, despite this significant loss in revenue, businesses were able to keep themselves afloat due to government assistance. Businesses were able to rely on these tax breaks and loans as opposed to their expected revenue to keep their business operating despite the shift in business activity brought on by the pandemic. This ultimately led to a decrease in the number of business bankruptcy in the past year.

Similarly, consumer and individual bankruptcies also decreased this past year. To begin, individuals were provided with stimulus checks to assist them through the financial hardships brought on by COVID-19. While the majority of these individuals used the checks to cover “essentials,” such as bills, food, etc., thirty-two percent of individuals receiving these checks put this money towards paying off debt they incurred prior to the COVID-19 pandemic.[28] Had they not incurred this extra cash, these individuals may have declared bankruptcy.

Additionally, with the pause on student loan payments and interest rates provided by the CARES Act, many individuals were spared declaring bankruptcy because of the “freeze” on these loans in the year 2021. While student loans are deemed “non-dischargeable debt” under the Bankruptcy Code,[29] thirty-two percent of individuals who file for chapter seven bankruptcy have outstanding student loan debts.[30] With student loan repayment no longer imminently looming over recent graduates or former students for the time being, many individuals can put their resources towards paying off loans that are not exempt under the CARES Act.

Finally, one of the biggest incentives for declaring bankruptcy for the individual consumer is the automatic stay, which bars civil proceedings from commencing against the debtor, including foreclosures.[31] Therefore, if a debtor is worried that they might lose their home as a result of a foreclosure, a debtor may turn to bankruptcy to stop this proceeding. However, the CARES Act includes provisions which temporarily stopped foreclosures and allowed for extensions on mortgage payments.[32] Because bankruptcy is no longer the primary mechanism through which a debtor can save their home, debtors have turned to the CARES Act to save their home as opposed to bankruptcy.

IV. Conclusion

COVID-19 has presented a myriad of issues which have created a general sense of uneasiness for everyone across the globe. It has been nearly impossible to accurately predict how the pandemic would impact every aspect of life. No one ever could have predicted that a pandemic which caused unemployment numbers to skyrocket would also indirectly lead to a decrease in the number of bankruptcies. However, as the world slowly begins its return to normalcy, bankruptcy trends will likely follow this return as well.

[1] The Economics Daily, Temporary Layoffs Remain High Following Unprecedented Surge in Early 2020, U.S. Bureau of Labor Statistics (Feb. 10, 2021), https://www.bls.gov/opub/ted/2021/temporary-layoffs-remain-high-following-unprecedented-surge-in-early-2020.htm?view_full.

[2] United States Courts, Bankruptcy Filings Drop 24 Percent, U.S. Courts (Feb.4, 2022), https://www.uscourts.gov/news/2022/02/04/bankruptcy-filings-drop-24-percent.

[3] United States Bankruptcy Code, 11 U.S.C.

[4] Non-exempt assets are the debtor’s assets that go into the bankruptcy estate to be sold or liquidated in order to satisfy the debt of the debtor. Exempt assets, on the other hand, are assets that the debtor is allowed to keep despite declaring bankruptcy, such as one’s home. Id. at § 522.

[5] Elizabeth Warren, Jay Westbrook, Katherine Porter & John Pottow, The Law of Debtors and Creditors: Text, Cases, and Problems 71 (8th Ed. 2021).

[6] Id.

[7] Id. at 5-6.

[8] Id. at 195.

[9] Id.

[10] Id.

[11] Id. at 579.

[12] Id.

[13] Maya Dollarhide, Chapter 11, Investopedia (Oct. 30, 2021), https://www.investopedia.com/terms/c/chapter11.asp.

[14] 15 U.S.C. § 116.

[15] Id.

[16] Id.

[17] Board of Governors of the Federal Reserve, Main Street Lending Program, The Fed. Rsrv. (Jan. 11, 2022), https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm.

[18] Assistance for Small Businesses, U.S. Dept. of Treasury, https://home.treasury.gov/policy-issues/coronavirus/assistance-for-small-businesses (last visited Feb. 16, 2022).

[19] These tax breaks included employee retention tax credit, deferment of payment to social security tax plans, and tax reductions for net operating losses. Id.

[20] 15 U.S.C. § 116.

[21]  Id.

[22] Id.

[23] Id. at §§ 4022-23.

[24] United States Courts, supra note 2.

[25] Id.

[26] Id.

[27] Rohit Arora, Study Finds Small Business Revenues Dropped 52% and Payrolls Declined 54% Due to COVID Pandemic, Forbes (Aug. 7, 2020), https://www.forbes.com/sites/rohitarora/2020/08/07/study-finds-small-business-revenues-dropped-52-and-payrolls-declined-54-due-to-covid-pandemic/?sh=2e4c2ec256db.

[28] Lorie Konish, Here’s How Americans Are Using Their $1,400 Stimulus Checks, CNBC (Apr. 14, 2021), https://www.cnbc.com/2021/04/14/heres-how-americans-are-using-their-1400-stimulus-checks.html.

[29] Student loans are debts that are non-dischargeable, or must be paid back eventually regardless of bankruptcy, unless the debtor can prove that the debts “would impose an undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C., supra note 3 at § 523(a)(8).

[30] Hillary Hoffower, An Astonishing Number of Bankruptcies Are Being Driven By Student Loan Debt, Bus. Insider (Jun. 13, 2019), https://www.businessinsider.com/people-filing-for-personal-bankruptcy-carry-student-loan-debt-2019-6.

[31] Warren, Westbrook, Porter & Pottow, supra note 5 at 49.

[32] 15 U.S.C. § 116.