Bankruptcy filings usually escalate after an economic downturn begins. So, it’s not surprising that when unemployment rose during the Covid-19 pandemic, economists expected bankruptcy filings to climb as well. But that’s not what happened.
In fact, April 2020 saw the largest percentage decline in month-over-month bankruptcy filings in the last 20 years, just as consumers were entering into the public health crisis. Could the numbers be right?
LexisNexis® Risk Solutions initially attributed the sharp decline in bankruptcy filings to lawyers’ offices and courthouses being shuttered. Although bankruptcy filings can be done online, the logic went—consumers weren’t filing for bankruptcies because they couldn’t get the proper legal advice and the necessary paperwork was behind a locked courthouse door.
Twelve months in however, and still no wave of bankruptcies. Perhaps the numbers weren’t telling the full story.
Government programs dulled economic pain
The driving force behind the reduction in bankruptcies has turned out to be the government programs that provided financial support during the pandemic. Consumers weren’t filing for bankruptcies because they didn’t need to!
Even into 2021, bankruptcy filings continue to decline. 2020 compared to 2019 saw 30% fewer bankruptcy filings. And 40% fewer consumers filed for bankruptcy in Q1 of 2021 than Q1 of 2020. This trend is even more drastic in the northeast, where 50% fewer consumers in northeastern states filed for bankruptcy in Q1 of 2021. And the trajectory doesn’t appear to be changing anytime soon.
What will the future bring?
It’s counterintuitive that bankruptcies plummeted while unemployment reached levels not seen since the depression era of the 1930s. Clearly, government programs accomplished what they were designed to do—shield consumers from pandemic-related credit distress.
Protections such as forbearance and negative reporting, eviction moratoriums, loan deferments, and stimulus checks allowed consumers to get by, by giving them stimulus funds to pay bills and allowing them to float bills until a later date.
Millions of Americans who saw their financial reality change rapidly during the pandemic were able to stave off disaster with government help. Now, with the flow of stimulus dollars going away, consumers who benefited from the additional cashflow may be in search of alternative financial products.
Determining creditworthiness just got much harder
For many lenders, this disintermediation between a consumer’s ability to repay debt and actual credit distress outcomes has presented yet another challenge to an already historically perplexing period—potentially decreased reliability of traditional consumer credit assessments.
With consumers’ creditworthiness obscured by government relief programs, lenders may not be seeing a fuller picture of consumer creditworthiness. How can they be confident in their lending decisions, grow their portfolio and compete effectively in today’s market when the tools they rely on may not be sufficient?
Additional data provides clearer insights
Lenders need a more robust view of borrowers. LexisNexis® Risk Solutions has been hard at work expanding the consumer perspective offered by our RiskView™ scores and attributes. Most recently we added a wealth of alternative credit-seeking insights from our acquisition of ID Analytics to build what may be one of the most robust sets of U.S. consumer credit assessment solutions available.
By leveraging additional, non-traditional data sources shown to correlate to creditworthiness, LexisNexis Risk Solutions provides greater insights into credit risk and behaviors. By recapturing the lost signal of consumer credit risk, lenders can more accurately assess borrowers and grow their portfolio with more confidence.
For more information on these solutions and how they can help you recapture a more robust picture of consumer creditworthiness, see risk.lexisnexis.com/creditrisk.