Perspectives
COVID-19 and Consumer Bankruptcy
The current coronavirus pandemic has had an unprecedented effect on all of us personally, professionally and financially. Businesses have closed and employees have been laid off. Unemployment compensation claims are at a record high. Individuals are under extraordinary stress with concerns about the health and safety of their family and loved ones.
With businesses shutting down either by government order or through lack of customers many find themselves with little or no income to pay their debts. The federal government has promised direct payment to citizens who qualify, which cannot come too soon. The federal government has also suspended foreclosures and evictions for federally backed mortgage loans. Some state and local courts have suspended or continued evictions during this crisis.
As income dries up and savings dwindle many people’s thoughts turn to bankruptcy. More often than not their thinking is along the lines of “I never thought I would have to do this.”
Bankruptcy Basics
The federal bankruptcy laws provide people who have suffered financial setbacks with the opportunity to start over. Filing for bankruptcy is the legal process to eliminate, reduce or reorganize one’s debts. The most common types of bankruptcy for individuals or married couples are the Chapter 7 bankruptcy and the Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
The Chapter 7 bankruptcy is the one that most people think of when they think of bankruptcy. Chapter 7 bankruptcy can discharge many types of debt providing someone with a “fresh start.” However, Chapter 7 is also known as the liquidation bankruptcy meaning that you may have to give up some of your property. The law does provide exemptions for your property, which, in most cases, are quite generous. With careful review and planning with a bankruptcy attorney, most people are able to keep all of their property.
Chapter 13 Bankruptcy
The Chapter 13 Bankruptcy allows someone to propose a payment plan to pay at least a portion of their debts in monthly payments over a 3 to 5 year period. In some cases, the Chapter 13 has advantages over the Chapter 7. For instance, a Chapter 13 can provide an opportunity to save one’s home from foreclosure by allowing them to cure delinquent mortgage payments over time. The Chapter 13 does not always require that all creditors be paid in full. At the end of the chapter 13 payment plan, any remaining debt is discharged. Essentially, one pays what one can afford to pay after their other necessary living expenses have been paid, over a 3 to 5 year period. At the end of that time, if one’s creditors have not been paid in full the remaining balance is erased.
The Process
The first step in the process is to get an attorney. One can represent one’s self in a bankruptcy, however, it is not recommended. The bankruptcy rules are complex and bankruptcy courts generally do not make allowances for individuals representing themselves.
Once you have found an attorney, he or she is going to request information and documentation regarding your financial situation. You are likely to be asked to provide copies of tax returns, pay stubs, car loan paperwork and mortgage loan paperwork. You will need to identify your creditors and the debts that you owe. You will need to list the property that you own. You will need to provide a breakdown of your monthly income and your monthly living expenses. This is the information and documentation that the attorney needs in order to prepare the petition and schedules that get filed with the bankruptcy court.
There is a credit counseling requirement and there is at least one mandatory hearing called the Meeting of Creditors. At present, most courts are either delaying these hearings or holding them by phone or video conference.
When to File
The decision to file bankruptcy is never an easy one. The best advice is that one should consult with a bankruptcy attorney. In that way, one can determine whether bankruptcy is the best option. If so, the next question would be what type of bankruptcy would be best. After that, the question becomes when is the right time to file.
In some instances, the decision may be to hold off on filing. Current events are changing the economic and legal landscape daily. As of the writing of this article, federal stimulus payments are on the way which may serve to tide individuals over. Some foreclosures have been suspended. Some courts have stayed or delayed eviction and other civil proceedings. Some creditors are voluntarily providing forbearances or deferments of payments. It may be possible for some to weather the storm. Again these are matters best discussed with one’s attorney.
After Bankruptcy
A Chapter 13 bankruptcy filing will stay on your credit record for seven years. On the other hand, a Chapter 7 filing will stay there for 10 years. During that time, you may have difficulty borrowing money, or borrowing affordably. One’s credit does improve over time.
Although bankruptcy is a good way to deal with unsecured debts, there are certain debts it will not wipe out. These include such debts as most back taxes, child support and alimony payments and, in many cases, student loans.