An additional 4.4 million Americans filed for unemployment last week. Over 16 percent of the labor force is currently unemployed. Some economists have cautioned that the so-called “Great Lockdown” will push the global economy into the worst recession since the Great Depression, when unemployment spiked to 25%. The unemployed worry about their ability to pay rent, groceries and all their bills.  Approximately 58% of Americans claim that they have lost income due to the coronavirus, according to Transunion’s online poll of over 3,000 adults. Of those polled, nearly seven out of ten are worried about paying their bills and making good on loans. 

Bankruptcy is a legal process available to consumers and businesses who are unable to pay their debt and who must find a way to pay at least a portion of their obligations. Consumer bankruptcies can take two forms: chapter 7 and chapter 13. A Chapter 7 bankruptcy liquidates a person’s “non- protected” assets into money earmarked to pay creditors. In other words, a Chapter 7 bankruptcy involves selling all “unprotected assets” that you own: a second vehicle, collectibles, stocks, a vacation home, etc. After a judge approves your filing in court, your debts are eradicated. Chapter 7 bankruptcies are best suited for (i) individuals who cannot repay all, or a substantial portion of, their debts or (ii) individuals who have an unmanageable amount of unsecured debt, such as a credit card. In contrast, a Chapter 13 bankruptcy (also known as a “reorganization bankruptcy”) is designed for those with a steady income who can pay all, or part of, their debts in installments. You generally don’t sell your property to pay off creditors in a Chapter 13 bankruptcy. The task becomes to make monthly payments to a Chapter 13 trustee with a plan that lasts 36 to 60 months. When the repayment plan is completed, you will receive a discharge order that wipes out the remainder of qualifying debt.

With the mounting pressures today, many people erroneously assume that bankruptcy is their only alternative. To the contrary, in several cases people can avoid filing for bankruptcy. President Trump signed a $2.2 trillion stimulus bill that offers forgivable loans to small businesses and $1,200 direct checks for people making up to $75,000 and $2,400 for couples earning under $150,000. In addition, the Coronavirus Aid, Relief and Economic Security Act (CARES) also made substantial changes to the Bankruptcy Code. They include:

• The direct checks (also known as “rebates”) do not count as income and, as a result, would not get factored into a “means test” that determines if someone can file a Chapter 7;
• The recovery rebates do not count as “disposable Income” that could be applied to things like credit card debts in Chapter 13;
• People who are already in Chapter 13 repayment plans and are experiencing financial hardship due to COVID-19 have a one-year window to change repayment terms. The timeframe may be further extended for up to two years.

Proponents of the CARES Act point out that Trump’s changes are “really positive” insofar as they help consumers in debt access Chapter 7’s bankruptcy protections while also allowing them to use their recovery rebates. In addition, the stimulus provisions allow people in Chapter 13 plans to use their direct checks and gain additional time on plans that normally must conclude within 5 years (plans now have 7 years).

Bankruptcy attorneys generally advise their clients to consider all the factors before filing for bankruptcy. Whenever someone is facing a situation where his or her debt is spiraling out of control there are basically 3 options:

1. Pay the minimum on all your bills, stay current and tough it out as long as you can and hope it goes your way.
2. Negotiate a settlement with your lenders.
3. File for bankruptcy.

In most cases, bankruptcy should be the last resort. The focus should be on working with your bank and loan servicers to procure immediate assistance in order to decrease or to defer your payments. You may retrieve your previous standing without filing for bankruptcy. Many banks, lawmakers and regulators are rolling out assistance programs. For instance, the $2 trillion Congressional relief package not only prevents lenders from foreclosing on federally backed loans, but also gives homeowners experiencing financial hardships the option to request up to 180 days of forbearance on their mortgage. In addition, many of the largest banks and credit unions have created hardship programs, offering to defer credit card, auto loan and student debt payments until borrowers can regain their equilibrium. The key is to be proactive and explore your options in terms of deferring or restructuring payments.

Once the forbearance and deferment programs end, you will need to pay your bills. In addition, your lender may require that you pay all of your missed payments at one time. If you are still struggling at that point, you should consider asking your lender for longer-term relief such as lowering the interest rates or monthly payment amounts due on your mortgage, auto loans or credit cards. If you are struggling to meet the obligations on your mortgage, you can apply for a loan modification that reworks the terms of your mortgage. In the case of credit card debt, you can negotiate a debt management plan or settlement to consolidate all of your outstanding debt into a single monthly payment that you pay off over the course of three years.

The vast majority of our country has felt the adverse economic impact of COVID-19. Do not panic or act rashly. Proceed methodically and with a complete understanding of your options. If you are considering filing for bankruptcy, it is highly advisable to obtain the guidance of an experienced attorney. For a free consultation, contact Haven Del Pino at Del Pino Law Firm at (305) 362-6277.