Unless you’ve been living under a rock these past few months (and haven’t been to the grocery store), you’re undoubtedly aware of the historical rate of inflation across the U.S. economy. Over the past 12 months, the consumer price index (CPI), which measures costs across dozens of consumer items, increased 7%.1 This represents the steepest rate of inflation since June of 1982.
When drilling down to specific types of consumer goods and services, the CPI paints an even more alarming picture: the cost of meat and pork has risen 15% in the past 12 months and gasoline is 50% more expensive than a year ago.2 New cars and trucks cost 12% more than a year ago, while used cars and trucks are an astonishing 37% more expensive.3 These trends continue across all manner of goods and services, from furniture and clothing to electricity and natural gas.
While bankruptcy filings have remained at historic lows for the past several months, one cannot help but wonder, “Is there a breaking point for consumers who were already struggling to make ends meet both before and during the pandemic?" The availability of government stimulus money to both individuals and businesses undoubtedly helped to bridge the gap for many in distress. The same can be said for various moratoria put in place at the state and federal level, which provided relief from foreclosure, eviction, student loan repayment, and legal executions, to name a few. Many of these stimulus programs have been exhausted and many moratoria have expired, while others, such as the student loan repayment moratorium, are set to expire in the coming months. All of this will occur as the average consumer continues to devote a larger percentage of their take-home pay to get to and from work, to feed their families, and to heat their homes.
This suggests that storm clouds are on the horizon for consumers and the potential exists for a steep increase in consumer bankruptcy filings nationwide. According to the Federal Reserve Bank of New York, the average monthly student loan payment is $393, and it is estimated that as many as 27 million Americans are currently utilizing the student loan moratorium to pause repayment of their loans4, with interest rates frozen at 0%. Suppose even 1% of those affected borrowers fall into financial distress in the coming months and file for bankruptcy relief. In that case, this could result in a 62% increase in total national bankruptcy filings compared to 2021. To put that estimate into perspective, the default rate for student loans has ranged anywhere from 5% to 11% over the past six years5, a period that saw historically low interest rates and annual inflation below 2%. The next 12-18 months will likely see the cost of borrowing increase as the Federal Reserve initiates a series of interest rate increases in 20226, while consumer prices remain well above levels seen in recent years.
While accurate forecasts of the economy and bankruptcy filing activity have been difficult to predict throughout the pandemic, the economic data suggests that lenders should prepare for the very real possibility of a dramatic rise in consumer defaults and corresponding bankruptcy filings. Pressure will continue to build on consumers’ household budgets, and those who barely made ends meet before the pandemic may soon find themselves with only one viable option: to file for bankruptcy relief.
Our Bankruptcy Recovery Team is constantly monitoring these updates. If you have questions, connect with shareholder and bankruptcy group chair Scott Fink at any time.
For more comprehensive information and insights, watch our webinar, The Current State of Bankruptcy Filings and What’s to Come: A Look Ahead to 2022, and/or read our blog, The Ebb and Flow of Bankruptcy Trends: What Tides Will Come in 2022?
This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.
1Consumer Price Index, US Department of Labor, Bureau of Labor Statistics – December 2021
When drilling down to specific types of consumer goods and services, the CPI paints an even more alarming picture: the cost of meat and pork has risen 15% in the past 12 months and gasoline is 50% more expensive than a year ago.2 New cars and trucks cost 12% more than a year ago, while used cars and trucks are an astonishing 37% more expensive.3 These trends continue across all manner of goods and services, from furniture and clothing to electricity and natural gas.
While bankruptcy filings have remained at historic lows for the past several months, one cannot help but wonder, “Is there a breaking point for consumers who were already struggling to make ends meet both before and during the pandemic?" The availability of government stimulus money to both individuals and businesses undoubtedly helped to bridge the gap for many in distress. The same can be said for various moratoria put in place at the state and federal level, which provided relief from foreclosure, eviction, student loan repayment, and legal executions, to name a few. Many of these stimulus programs have been exhausted and many moratoria have expired, while others, such as the student loan repayment moratorium, are set to expire in the coming months. All of this will occur as the average consumer continues to devote a larger percentage of their take-home pay to get to and from work, to feed their families, and to heat their homes.
This suggests that storm clouds are on the horizon for consumers and the potential exists for a steep increase in consumer bankruptcy filings nationwide. According to the Federal Reserve Bank of New York, the average monthly student loan payment is $393, and it is estimated that as many as 27 million Americans are currently utilizing the student loan moratorium to pause repayment of their loans4, with interest rates frozen at 0%. Suppose even 1% of those affected borrowers fall into financial distress in the coming months and file for bankruptcy relief. In that case, this could result in a 62% increase in total national bankruptcy filings compared to 2021. To put that estimate into perspective, the default rate for student loans has ranged anywhere from 5% to 11% over the past six years5, a period that saw historically low interest rates and annual inflation below 2%. The next 12-18 months will likely see the cost of borrowing increase as the Federal Reserve initiates a series of interest rate increases in 20226, while consumer prices remain well above levels seen in recent years.
While accurate forecasts of the economy and bankruptcy filing activity have been difficult to predict throughout the pandemic, the economic data suggests that lenders should prepare for the very real possibility of a dramatic rise in consumer defaults and corresponding bankruptcy filings. Pressure will continue to build on consumers’ household budgets, and those who barely made ends meet before the pandemic may soon find themselves with only one viable option: to file for bankruptcy relief.
Our Bankruptcy Recovery Team is constantly monitoring these updates. If you have questions, connect with shareholder and bankruptcy group chair Scott Fink at any time.
For more comprehensive information and insights, watch our webinar, The Current State of Bankruptcy Filings and What’s to Come: A Look Ahead to 2022, and/or read our blog, The Ebb and Flow of Bankruptcy Trends: What Tides Will Come in 2022?
This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.
