Las Vegas was one of the hardest hit cities by the Great Recession in the late 2000s, as the economic devastation brought a housing crisis with foreclosures and forced thousands of people to file for bankruptcy.
Nevada had the most bankruptcy filings of any state in the country in 2009 and 2010 with around 30,000 each year, according to the American Bankruptcy Institute.
Once the coronavirus pandemic surfaced in the United States in early 2020, local bankruptcy attorney Ryan Works figured the economic downturn caused by the virus would lead to another drastic uptick in filings.
To his surprise, and to the surprise of others who track bankruptcy filings, that hasn’t happened. At least, not yet.
“Most of us were predicting a massive influx,” said Works, chair of the bankruptcy, insolvency and financial restructuring division at the McDonald Carano law firm. “Certainly, things changed when we had trillions of dollars infused into the American economy. Loans, grants for small businesses and restaurants, all that money turned that upside down.”
In fact, only about 7,000 bankruptcy filings were executed in Nevada in 2021, according to the institute. That represented the lowest yearly total in the state since about 5,500 filings were made in 2006.
The vast majority of all bankruptcy cases in Nevada—the same remains true across the country—are of the Chapter 7 variety. In the case of a Chapter 7 bankruptcy, an individual can get relief from consumer or medical debts—two of the most common reasons for a person to consider bankruptcy—but has to go through a process where certain “non-exempt” assets can be liquidated to help pay off creditors.
An exempt asset would typically be a home or a vehicle.
One of the drawbacks to the financial fresh start is that a person’s credit history will be flagged, which can affect various areas of a person’s financial existence.
Works said he still thinks a wave of personal and business bankruptcies will show up in Nevada, but Ed Flynn of the American Bankruptcy Institute said he’s not as confident that will materialize.
“Right now, we’re getting an average of 7,000 cases per week,” Flynn said of national bankruptcies. “I’m not too convinced it will go up. Twenty years ago, we were in the range of 1.5 million per year.”
Flynn said the strange brew of economic conditions seen since early 2020 has thrown predictability to the wind.
Because of pauses in student loan repayments, mortgage payback schedules, and the rollout of government protection and tax credit programs, many have been able to stay afloat financially when they may not have during a typical recession cycle.
“If we compare today with the Great Recession, a lot of wealth went away back then,” Flynn said. “Housing prices went down by a third pretty much everywhere. Now, housing prices are up, the stock market is up, and employment is fairly high. This is different than the last time. In Nevada, I don’t think it’s going back up to 30,000 per year.”
There are signs of trouble for consumers, though, which could trigger an increase in bankruptcy filings.
During the last three months of 2021, according to the New York Federal Reserve, there was a $52 billion increase in credit card debt for the American consumer.
Federal student loan repayments are also scheduled to restart in May, though another extension could be granted.
To top it off, gas prices are at or near record highs in the U.S., and rents are up in many parts of the country.
In short, a stressed housing market and troubling inflation trends mean that people are paying more for non-discretionary costs.
“There’s also billions of dollars of medical debt out there,” Works said. “We’ll see a wave. When that comes, I just don’t know. What it will mean, I don’t know, but it could have an effect younger people. I think a lot of people put things on their credit cards during the pandemic because they stayed at home and shopped on Amazon.”
Works, who handles mostly business debt restructuring cases, said he thinks a consumer bankruptcy wave will be followed by a “substantial” business wave.
Flynn said he suspects that many business owners across the country simply decided to close their doors instead of filing for bankruptcy protection.
That might explain why Chapter 11 filings nationwide last year dropped to a level—about 4,800—not seen since before the Great Recession.
Brian Shapiro, a Las Vegas attorney who also serves as a bankruptcy trustee, said he’s noticed more “stressed out” people in his bankruptcy dealings since the start of the pandemic.
“I just haven’t seen an increase in filings, but I still expect that they’ll come,” Shapiro said. “I don’t know how people are able to afford rent and gas with all this inflation. I have gotten a lot of consultants in the past year or so, but I just haven’t seen the filings.”
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