Believe it or not, bankruptcy is down. What does that mean?

According to the American Bankruptcy Institute, personal bankruptcy filings declined in 2020 to their lowest level since 1987. You would not be alone if you found this surprising, as I did. But should we have?

What happened was…wait for it…the CARES Act worked.

Imperfect as it was, emergency government financial assistance has so far saved many households from potentially long-lasting financial destruction. And therein lay a lesson.

First, a detour. According to a 2015 Cornell University study, an amazingly large percentage of Americans believe that they do not receive government assistance despite the incontrovertible fact that they do, Social Security most obviously. Many people do not perceive Social Security as “government assistance” because they “paid for it” through the FICA payroll deduction; the Social Security benefit is viewed as a repayment of their investment. Never mind that the dollar value of what they will receive will almost certainly exceed what they paid in. When taxpayers can draw a straight line from their tax payment to a valued benefit, that benefit takes on the features of a “right” and will be jealously defended.

Back to the CARES Act… What we re-learned last year was that, just like Social Security, voters will support taxpayer supported social safety net spending if the benefits of it are personally tangible. Hence the widespread appeal of the $2000 stimulus payment. What we also re-learned from CARES was that social safety net spending does, broadly speaking, achieve the desired result of keeping households afloat financially at their most vulnerable moments. Thus, record low bankruptcy filings.

Unfortunately, the fall in bankruptcies also tells us something about the rise in inequality during the pandemic. Even as fewer families fell into bankruptcy, more families found it hard to simply put a meal on the table. Food insecurity has risen to new highs. How did that happen? Ironically, you must have some assets to file bankruptcy; there is little reason to file bankruptcy if you have no assets to protect from creditors. (Can’t take blood out of a stone and all that…) We know that the impact of COVID-19 has been disproportionately borne by low income workers in the service sector. I suspect that what we are seeing is that relatively wealthier families, buoyed by CARES relief and perhaps retirement account withdrawals, were able to stay out of bankruptcy even as their income dropped, while poorer families did not receive nearly enough assistance to adequately replace a complete loss of income.

For future COVID-19 relief packages, the lessons are obvious. One, the narrative matters. Two, we need a more targeted approach to address the unequal impacts of the pandemic. Yes, inevitably some people who do not need it will nevertheless receive a so-called stimulus check. But more importantly, for many recipients the stimulus payment will be wholly inadequate to their needs. The latter circumstance is by far more concerning. Targeting assistance is not an argument for less relief. Targeting means “Yes, direct payments, and…



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