Bankruptcy Filings To Increase During COVID-19 Pandemic
Unfortunately for the world of business and homeownership, bankruptcies are not expected to decline during this tumultuous time. In fact, it looks as though they’re going to continue rising and remain consistently high for the rest of the foreseeable future. Does this indicate a full-on crisis in the credit market?
Or is simply a (rather large) ripple that should not be read as indicative of the way the economy is leaning right now? According to financial health experts and finance professionals, we do have reasons to be concerned.
What is Bankruptcy?
Bankruptcy is a serious court proceeding in which you go in front of a judge and court trustee to examine exactly how much debt you’re in, and if you have any unnecessary assets (investments, properties, expensive cars, etc). The judge then decides whether or not to discharge your debt so that you are no longer legally required to pay them off.
Bankruptcy as a concept was invented by our capitalistic economy as a way for people to start over or get a fresh start when they’ve dug themselves into a hole too deep to recover from on their own.
Will Bankruptcies Rise Due to Coronavirus Fears?
According to one leading bankruptcy professor, NYU Stern School of Business professor emeritus Ed Altman, “bankruptcy and default potential for high-yield companies doubled from 5% to 10% in just a few weeks.” These numbers, he says, are showing a likely default rate over the next twelve months of just under 10 percent, which is a huge, unprecedented increase in just a few weeks. “It does signal a crisis in the credit market whenever you get to that 10% level.”
Altman, who, almost fifty years ago, pioneered his “Altman Z-score” as a universal method of measuring any company’s bankruptcy risk, says that the current level of distress in the corporate debt market is just now reaching the same status as the 2008 financial crisis.
Comparisons to the 2008 Financial Crisis
In 2008, the Balance reports, the United States experienced “the worst economic disaster since the Great Depression of 1929,” which “occurred despite Federal Reserve and Treasury Department efforts to prevent it.” The crisis then led to the Great Recession, when prices for houses dropped more than the price drop during the Depression of 1929.
If this is what we’re trying to avoid, it’s time to do something now. And quickly.
What’s Scary: How Quickly This is Happening
What’s even more alarming than a distress ratio so high it hasn’t been seen since the Great Recession, Altman advises, is the speed at which the high-yield bond market is coming undone. “Altman says it took three months for spreads between high-yield bonds and comparable Treasuries to peak, whereas the same thing has happened now in a mere matter of weeks.”
So, if anything, it’s the speed at which the economy is unraveling that has taken Altman and other financial professionals by surprise — and shocked them into speaking out.
Another Contributing Factor
Altman believes there’s one more bogeyman involved in this entire problem: “the danger that is looming in the form of inevitable credit rating downgrades, which could force some investors to shed their holdings if they aren’t allowed to invest in non-investment grade rated debt.” He mentions Casino operations company Las Vegas Sands, which is tottering on a bad BBB-rating from S&P Global Ratings, which would bring about a downgrade that would thrust its debt into junk status.
This could turn into “the worst period for corporate default amounts that we’ve ever seen,” says Altman. However, it may be consoling to know that businesses only account for a small percentage of those that file for bankruptcy. In 2015, there were 844,495 bankruptcy cases filed in 2015, and 97% of them (819,760) were filed by individuals, according to Debt.org.
The Worst We’ve Ever Seen
If we are to believe some of the top financial health professionals in their respective fields, then it appears that there will be no slowdown to the number of bankruptcies for the duration of the coronavirus pandemic. In fact, if anything, bankruptcies and other default strategies are going to increase exponentially in the near future. You may even see a national recession on the same scale as the one that happened in 2008.
What Can I Do?
But fear not! If you want to stop creditor phone calls and eliminate the debt you currently have, so that you’re protected if or when the economy does come crashing down, you need to reach out to Walker & Walker Law Offices today. We can help you get a fresh start and begin building up that new credit score.
You won’t have to give up your home, your car, your retirement savings, or any other personal property. We’ll keep you safe and secure while ensuring you get a clean blank slate today. Call now to set up your personalized assessment consultation. Evening, weekend and phone conferences are available. We return emails and form submissions immediately during business hours.
