Economic Stimulus Temporarily Saved Americans from Bankruptcy

Posted by Ian Smith | Jul 20, 2020 | 0 Comments

Federal Aid Has so far Averted Personal Bankruptcies, but Trouble Looms. NY TIMES.

The economic stimulus package passed in March to deal with the catastrophic economic fallout from Covid-19 has only temporarily saved Americans from the financial fallout. By mid-June the treasury department had issued $270 billion in stimulus payments to 160 million Americans. One of the key parts of the economic stimulus passed was a $600 per week temporary unemployment benefit. This $600 payment was unprecedented, it allowed those claiming unemployment to dramatically increase their unemployment payment. The average unemployment benefit in the United States before the stimulus payment was roughly $340.  This $600 additional payment has allowed some people to use the stimulus to actually pay down debts. However, there are a few negative consequences of such a large stimulus package. First, some recipients are actually collecting more money from their unemployment benefits than they were collecting in wages before the crisis. This has a detrimental effect on the labor market because it disincentives some to return to work. Second, although the stimulus will hold off the inevitable debt wave that is likely to hit many Americans, the stimulus is set to sunset at the end of July. Lastly, the bill being proposed in Congress to extend the stimulus is likely to reduce this $600 additional unemployment benefit. 

The Covid-19 crisis has disproportionately hurt lower income households. By mid-May, 40% of families making less than $40,000 had lost at least one job in the family. This is compared to roughly 20% of families with an income of $40,000-$100,000 and only 13% of families with an income in excess of $100,000. This is particularly alarming because the bottom half of wage earners in the U.S. are carrying debt that is equal to 219% of their income. Leading up to the Covid-19 crisis, American households had amassed $14.3 trillion in household debt in the Q1 of 2020. This is a record amount of debt held by Americans. As more Americans lose their jobs, many Americans will turn to credit cards to pay off their debts. Credit card debt has high interest rates attached to it. The families using credit cards to offset the loss of wages from a job will eventually amass untenable debts. 

The unique situation we find ourselves in today is due to these large debt loads and this unprecedented stimulus. Currently, the U.S. is experiencing its largest drop in personal Bankruptcy filings in fifteen years. Much of that is attributed to the stimulus band-aid discussed above. But, the stimulus package and the new proposed one making its way through congress can not change the structural problems facing the U.S. Americans are sitting on a record amount of debt, and although the stimulus packages have alleviated many debtors' situations temporarily, a reckoning is coming. When the stimulus fades away the debt will remain. If you are struggling with making payments on your credit cards, or you are worried about the mortgage on your home contact us today at the Smith Law Firm LLC to see if we can help you mitigate  your debts in this extraordinary time.

About the Author

Ian Smith

Ian Smith was born and raised in Jackson, Wyoming. His parents were NOLS instructors so his childhood was filled with outdoor adventuring across beautiful Wyoming. He spends his free time in the outdoors; fishing, hunting with his father, skiing, mountain biking, and camping. Ian spent his twentie...


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