Due date is quickly approaching for Nevadans who have racked up thousands of dollars in missed rent payments and other debts.
For many, easing the financial burden will mean filing for bankruptcy, and experts predict a tsunami of filings after the new year, when the remaining relief from March’s federal $2 trillion stimulus package known as the CARES Act expires.
An influx of bankruptcies normally corresponds to an increasing unemployment rate, and a coronavirus- fueled recession and a skyrocketing number of jobless workers would cause more filings. But in an unexpected twist, the number of people filing for personal bankruptcy such as Chapter 7 and Chapter 13 has dropped significantly since mid-March, according to a September study from Harvard Business School.
Las Vegas attorney Rory Vohwinkel typically receives up to 10 new Chapter 13 bankruptcy cases each month, but it has been quiet.
“We haven’t seen any in our office in the past two or three months,” Vohwinkel said, whose namesake law firm handles bankruptcies and foreclosures.
Calm before the storm
During the Great Recession, Nevada reported the highest unemployment rate in the country every year from 2010 to 2012, peaking in 2010 with a 14.9 percent unemployment rate. It was also the year Nevada reported the highest number of personal bankruptcy filings between 2000 and 2019 with total Chapter 7 and Chapter 13 filings reaching 29,678.
For this year through Sept. 30, consumer bankruptcies in Nevada declined 22 percent year-over-year with Chapter 7 and Chapter 13 filings at 5,115 and 682, respectively, according to the American Bankruptcy Institute.
Sullivan Hill Managing Attorney Elizabeth Stephens said the CARES Act is why consumer bankruptcies are down including in Las Vegas.
“(It) poured $2.2 trillion into the economy,” she said, adding she expects to see “a torrent of bankruptcy filings” after CARES Act protections like additional unemployment benefits and other federal provisions such as the federal eviction moratorium expire Dec. 31.
Stephens also pointed to an increase of commercial Chapter 11 bankruptcies as a key indicator of what is to come for consumer filings.
“Generally, business bankruptcies precede consumer bankruptcies,” she said.
ABI reported last month Chapter 11 filings increased nationally by 33 percent during the first nine months of this year to 5,529 compared with the same period in 2019.
The Federal Reserve Bank of San Francisco also released a study last month saying, “Chapter 11 bankruptcy filings are running at their fastest pace since 2013. The number of companies that have defaulted on their debt so far this year has surpassed the total for all of 2019 and is on course to be the highest since 2009.”
7 vs. 13
Andrea Gandara, bankruptcy attorney at Holley Driggs, is looking ahead.
“I think at the end of year and into early next year we’ll see a significant increase in bankruptcy filings caused primarily because of unpaid rents and mortgages that have been outstanding since spring and coming due (after Dec. 31),” she said, referring to nonpayment-of-rent eviction moratoriums currently in place.
Vohwinkel, of Vohwinkel Law, said bankruptcy courts are still catching up as they essentially closed down with the state in mid-March.
“During that time, none of the creditors were filing lawsuits to pursue debts against debtors so there weren’t any garnished wages being processed and a lot of people were losing their jobs — they didn’t have jobs to get garnished,” he said.
Vohwinkel said he typically doesn’t see clients until they’re about to be evicted or their home is going into foreclosure. He also noted most consumers start to consider bankruptcy when they’re served with a lawsuit by a creditor.
Consumers can either file Chapter 7 or Chapter 13, depending on their income and debt. Stephens, of Sullivan Hill, said attorneys typically offer free consultations, but the process costs several thousand dollars because of filing and attorney fees. It can also hurt a filer’s credit history as the bankruptcy will appear for as long as 10 years on a credit report.
Chapter 7 is considered a “fresh start bankruptcy” because it wipes out the filer’s debt, but applicants must qualify by earning less than the median income, according to Vohwinkel.
He said Chapter 13 filings are for those who may be behind on their payments but would like to keep their assets, like a home. A filer’s missed payments would be spread out over a three- to five-year repayment plan. He noted it’s also helpful for those who have IRS debt.
While the number of bankruptcy clients are relatively low, Vohwinkel said it’s likely to change next year and even into 2022.
“I’m expecting there to be similar numbers to 2008 and 2009,” he said.
Nevada’s economy was thriving before the spreading coronavirus upended life. The state’s unemployment rate was 3.9 percent in January, the state Nevada Department of Employment, Training and Rehabilitation reported. It was the lowest rate dating to 1976.
In 2019, direct visitor spending in Southern Nevada reached a high of $36.9 billion since 2010, and it accounted for nearly a third of the area’s gross economic output of $122.4 billion, according to an April report from Las Vegas Convention and Visitors Authority.
Everything changed after March 17 when Gov. Steve Sisolak ordered the temporary closure of casinos and nonessential businesses, throwing thousands of workers into the state’s unemployment insurance system.
Independent contractors and self-employed workers were able to receive unemployment benefits for the first time under a provision in the CARES Act, which also provided an additional $600 weekly unemployment insurance payment. It also included temporary bans on residential evictions, a pause on consumers having to pay their student loans until Dec. 31 and several federal lending programs.
The measures were needed in a state largely dependent on tourism, an industry hit particularly hard as out-of-state visitors were encouraged to stay home.
“The spread of COVID-19 caused the near shutdown of the Nevada economy, significantly affecting business activity and the job market,” said economist John Restrepo of RCG Economics. “This is exactly the kind of situation that requires a large-scale response by the federal government.”
Nevada has largely reopened since March, but at least 209,052 residents are unemployed and collecting jobless benefits as of Oct. 31.
Nevada’s employment office reported last month the seasonally adjusted unemployment rate for September was 12.6 percent, down from 13.3 percent in August but up 8.9 percentage points year-over-year.
Restrepo said a spike in bankruptcies would further drag the economy down.
“The economic implications for Nevada … would be a prolonged economic recovery for the state — think Great Recession,” Restrepo said.