By Janet Howard
Derek and his wife were doing pretty good: two-family house with a mortgage, two vehicles, two credit cards, decent jobs, two kids in college. Then the pandemic hit, and his wife, Joyce, lost her supervisor job at a hotel in Manhattan. Suddenly, they were no longer doing pretty good. Derek still had his job with the MTA, but the loss of his wife’s income, coupled with the uncertainty and the bills again coming in regularly like the sun rising, had financial difficulty set in.
Derek, with his family’s financial situation looking bleak, has started the process to file for bankruptcy. What is the average Joe and Jane to do? What is the legal bailout? It just makes sense that anyone who was already having or starting to have difficulty meeting their financial commitments would strongly consider and file for bankruptcy. It just makes sense; logical.
And the bankruptcy experts agree that bankruptcy is the logical direction in this current bleak financial situation. Considering a new spike in unemployment and remembering how the Great Recession caused a wave of bankruptcy cases, consumers were seeking a reset after getting too far behind on debt. “We think business filings will see an uptick in April with consumer filings to surge in May and June,” said Amy Quackenboss, executive director at the American Bankruptcy Institute, a professional association comprised of lawyers for debtors and creditors, judges and other bankruptcy specialists.
The increase could take a bit longer because, in times of crisis, “people don’t normally race off to file bankruptcy,” said John Rao, a National Consumer Law Center staff attorney specializing in consumer bankruptcy. Still, “there is no question that given the effect of this pandemic, there will be an increase of bankruptcies. It’s really a question of when that rise will occur.”
What is Bankruptcy?
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor. The two most common types of personal bankruptcies are chapter 7 and chapter 13. Below is a quick overview of each type of bankruptcy. Review the summary below to discover which type of bankruptcy may help you. Of course, a consultation with an experienced bankruptcy attorney will steer you in the right direction.
Chapter 7 (Liquidation)
Usually the best option when:
•You have very little property except for basic necessities like clothing and furniture.
•Your debts are primarily unsecured debts like credit cards or medical bills.
•You have little or no money left over at the end of each month once you’ve paid your basic living expenses.
Chapter 13 (Repayment)
Usually the best option when:
•You have equity in a property that you don’t want to have to liquidate to pay creditors.
•You have regular income and can afford to pay your living expenses plus some, but not enough to pay your debts as agreed.
The Stimulus Bill and Bankruptcy
The Coronavirus Aid, Relief, and Economic Security (CARES) Act made changes to the bankruptcy code. It says:
•The direct checks, dubbed “recovery rebates,” do not count as income that would get factored into a “means test” that determines if someone can file a Chapter 7 bankruptcy case.
•The recovery rebates also do not count as “disposable income” that could be applied to things like credit card debts in Chapter 13 cases.
•People who are already in Chapter 13 repayment plans and now experiencing financial hardship because of the outbreak have a one-year window to change
repayment terms. They can extend their repayment time-frame up to two years longer.
•The bankruptcy-related provisions expire on March 27, one year after being signed the bill into law.
Right for You
Bottom-line is life throws us many twists and turns. And, sometimes filing for bankruptcy is inevitable. If you can’t find a clear financial direction through the coronavirus outbreak after your layoff, bankruptcy might be your best option. Filing for bankruptcy will affect your credit score, but it will improve with time—and often far sooner than most filers expect. In fact, many people find that filing for bankruptcy repairs credit faster than would be possible otherwise. Remember, the quicker you file, the sooner you will be able to rebuild your credit and get back on your feet, free of debt.