Everyone is maybe—but probably not—getting $5,000: My Reaction
The best analog isn’t the pandemic or Great Recession stimuli, but something altogether surprising. It happens every year. I’m talking about tax season, when many people get a tidy windfall of cash. Nonetheless, tax season isn’t great for everyone, and the bounty is not evenly distributed.
A $5k payout is not going to happen. But let’s pretend it does.
The number one question people will have on their mind is how will a $5k payout–whether fantasy or fact–will impact a bankruptcy case. They are going to wonder whether they can even get a $5k payout if they are filing, or still file if they’ve already gotten it.
A lot of bankruptcy attorneys might mistakenly believe that if these checks ever get cut then some people could end up ineligible for Chapter 7 bankruptcy because they no longer “pass” the means test. They might encourage people to file before the check arrives, and then use whatever wildcard exemption room they have to protect some or all of the $5k. Then again, a magic $5k payment isn’t recurring income, which means that you can actually still “pass” the means test. I have no doubt that the various US Trustee regions will have varying opinions on this question. Experienced attorneys will know how to navigate this in their districts.
How will this impact bankruptcy filings? I think a hypothetical $5k windfall will impact typical motivations more than you might think. In the near term, I actually do think the ideaof maybe getting $5k will suppress filings over the next two months, and then lead to an increase immediately afterwards. Why? Unlike tax season, the present topic is sudden, uncertain to occur, and confusing.
Here’s my full reaction:
First, I think people who are facing wage garnishments will have some extra money to hire an attorney, which will mean that filings among this cohort are likely to increase considerably. I think the same could be true of those who are facing foreclosure and imminent lawsuits.
Second, I think people who are on the cusp of financial ruin will use the $5k to prevent the dam from breaking a little longer. People who are unemployed are probably going to take that $5k and use it on living expenses. Lost jobs account for a lot of bankruptcies (and foreclosures). A $5k cushion could keep people going while they find their next job, and this could prevent a bankruptcy filing all-together. I expect a drop in the number of cases being filed by members of this cohort.
Third, I think people who are about to default (regardless of employment status) will self-sort between those who use the infusion to file because they owe so much that $5k doesn’t move the needle, and those who want to keep fighting because $5k cuts their debt by half (or something along those lines). This cohort isn’t that hard to figure out and human nature doesn’t change because of transient changes in their economic fortunes. No one owing $40k in credit cards is going to want to throw a $5k windfall into a black hole only to end up having to file a few months later. But that changes if they owe a mere $10k.
Many of the people I talk to are on the verge of default. A $5k infusion would probably make a meaningful difference to about 10% of them. That’s not nothing. I do think there will be a reduction in filings from this group, but only in the aggregate and only in the short term. I would expect a surge at tax time.
Fourth, many of the cohorts overlap. There are some who lost their job and who are being foreclosed upon, and $5k does not help them fund a Chapter 13 plan, but would help them file a Chapter 7 if that $5k could cure their mortgage arrears.
Then there are unemployed renters who will avoid eviction with that $5k… and then file six months later once they are steadily paying rent again. Then there are the young and the elderly who just want the albatross off their back, and $5k will buy them top-notch legal representation.
Fifth, and this should go without saying, there will probably be a reduction in pro se filers. After all, no one actually wants to file without an attorney, and a $5k infusion will help them find a good one.
Verdict: I think bankruptcy filings increase, perhaps dramatically. November and December are not big months for bankruptcy filings, but delayed filings and cash infusions should make these months hot… and make October cold.
-
If you haven’t noticed, bankruptcy is my first love, and I always enjoy a good conversation about the topic. Do I think the $5k checks will get cut? No. Full stop. It was still fun to think about.
