The Effects of Covid-19 on Bankruptcy Filing and Mortgage Foreclosures
When Covid-19 forced lockdowns across the nation in 2020, unemployment skyrocketed, many industries screeched to a halt, and the economy contracted sharply in the second quarter of the year.
Despite the bleak economic situation, some economic data like bankruptcies and delinquent mortgages told a different story if you took it at face value.
For example, data and analysis emerging on bankruptcies and mortgages showed the opposite of what you’d think would happen with 10 million people unemployed and businesses still dealing with lockdowns.
Bankruptcy filings fell more than 20 percent in the 12 months ending September 30, 2020. And government legislation temporarily staved off many foreclosure proceedings.
But those raw numbers only told part of the story. Here’s a look at what happened with bankruptcies and mortgages during that period, what has happened since, and what it means for homeowners facing foreclosure today.
Business bankruptcies rose while consumer cases fell
Despite the economy being in an unstable state, bankruptcy filings plummeted in the 12 months ending September 30, 2020, according to the Administrative Office of the U.S. Courts.
There were 612,561 bankruptcy filings in that period, according to the courts. That number was about 21 percent less than the prior year, when 776,674 cases were filed.
For the eastern Pennsylvania region, cases were down 28 percent. Only 5,936 were filed, compared to 8,274 the year before.
The courts report the entire state of New Jersey’s cases as a whole, not by region. All totaled, 17,237 cases were filed, compared to 25,399 the year before. That was a 32 percent decrease.
The court offices said that bankruptcy filings generally increase after the beginning of an economic downturn. For the Great Recession, filings increased for a couple of years before hitting the peak in 2010. Disrupted court schedules during the pandemic may also have contributed to the drop in cases.
A group of Harvard researchers analyzed filings for the year and found Chapter 7 filings for consumers and businesses were tracking at about 20 percent below 2019 levels. Chapter 13 filings were 55 to 65 percent below 2019 totals.
While unemployment rates have historically impacted bankruptcy filings, that wasn’t necessarily the case with the pandemic as numbers decreased, according to the researchers.
The Harvard researchers said they believed consumers, small businesses, and corporations had very different financial experiences during the pandemic.
Larger businesses were filing 200 percent more Chapter 11 cases than in 2019. Wealthy homeowners were helped by the stimulus, according to the researchers. Meanwhile, smaller businesses and renters found the pandemic more challenging to navigate, and many faced financial, physical and tech obstacles to getting their cases into the bankruptcy system.
Mortgage foreclosures
During the pandemic, federal protections for homeowners made it hard to see how much trouble the mortgage market was really in.
Those protections came through the CARES Act, a Covid relief law signed by President Trump in March 2020, and later federal extensions. They protected homeowners who couldn’t pay their mortgage on two fronts.
The first was a moratorium on foreclosures for federally backed mortgages, which was extended several times before it ended on July 31, 2021. The second allowed homeowners with federally backed mortgages to request a forbearance of up to 180 days, with an extension of up to another 180 days. Federal agencies later allowed some borrowers to extend forbearance even longer.
Once the moratorium ended, homeowners who had fallen behind were again subject to the regular mortgage foreclosure process.
While the protections were in place, the data on the health of the mortgage market conflicted. The New York Fed reported that the number of seriously delinquent mortgage payments was at a 15-year low. Those are payments that are more than 90 days overdue. The low number was attributed to the CARES Act forbearance allowance.
However, CoreLogic, a property data company, reported that its seriously delinquent rate was at a five-year high, and mortgage payments 120 days past due were at a 21-year high. CoreLogic’s reporting included mortgage payments missed for any reason, including forbearance.
At the time, Pennsylvania had a mortgage delinquency rate of 1.13 percent and ranked No. 15 for highest mortgage delinquency rate, according to Construction Coverage. New Jersey ranked No. 4 on the list with a rate of 1.73 percent, and New York was No. 1, with a rate of 1.9 percent.
What happened next?
As the pandemic protections wound down, many experts expected a wave of new bankruptcy cases.
At an American Bankruptcy Institute Journal discussion on the topic in late October 2020, panelists said the end of the CARES Act stimulus, student loan debt, and job losses could drive up bankruptcy filings. Ed Flynn, the journal’s editor, said there could be more than 1 million filings as the CARES Act stimulus ended.
That surge did not arrive right away. Filings kept falling and reached a low of 380,634 cases in the 12 months ending June 30, 2022, according to the federal courts. They have climbed since then. In the 12 months ending June 30, 2026, there were 608,511 bankruptcy filings, a 12.2 percent increase over the year before, though still far below the peak of nearly 1.6 million in 2010.
For homeowners who fall behind today, bankruptcy remains one of the most effective ways to stop a foreclosure. Filing triggers an automatic stay that halts the foreclosure proceeding, and Chapter 13 lets homeowners catch up on missed mortgage payments over a three to five year repayment plan while keeping current on their regular payments.
Young, Marr, Mallis & Associates has helped clients in more than 15,000 bankruptcy cases across Pennsylvania and New Jersey over more than 40 years. Call 215-639-5297 for a free consultation.