It is no surprise that bankruptcy filings due to COVID-19 related hardships have skyrocketed since the middle of March when New York State reported its first deaths from the Coronavirus and Governor Andrew Cuomo closed all nonessential businesses. According to Bloomberg News, “the pandemic has battered New York City businesses, with almost 6,000 closures, a jump of about 40% in bankruptcy filings across the region and shuttered storefronts in the business districts of all five boroughs.” https://www.bloomberg.com/news/features/2020-09-29/new-york-city-bankruptcies-2020-pivotal-point-for-business-as-covid-cases-rise
Advantages to Filing Bankruptcy Now
Sometimes filing for bankruptcy is inevitable, especially if there is no clear financial pathway through the coronavirus pandemic after your layoff. One of the most significant benefits of bankruptcy is its ability to discharge (wipe out) credit card balances, medical bills, and rent—the same types of debts that will likely get out-of-hand during the coronavirus crisis. Fortunately, local, state and federal governments have worked to provide safety nets during the COVID-19 pandemic. Income tests, such as the “Means Test” to qualify for bankruptcy are now easier to meet due to lower income for many potential filers, which allows people to qualify for a Chapter 7 bankruptcy.
Changes to Coronavirus Bankruptcy Cases
The Coronavirus Aid, Relief and Economic Security (CARES) Act have changed the landscape of consumer bankruptcy cases, especially with regard to the treatment of mortgage debt. Essentially, bankruptcy laws have been enhanced to make it easier to file. Furthermore, there has been more understanding and less scrutiny in bankruptcy courts especially where COVID-19 hardships are a faction. The key changes in the law that make a Chapter 7 and Chapter 13 bankruptcy easier to file are:
- Coronavirus related payments from the federal government, such as stimulus, will not be included in the definition of “income” nor will such payments be included in the calculation of “disposable income” for plan confirmation purposes.
- Chapter 13 debtors with existing confirmed plans who have experienced “material financial hardship” due to COVID-19 will be allowed to extend their payments for up to seven years after their first plan payment was due under the Chapter 13 Plan. Essentially, the creditor will receive less monthly arrearage payments in the modified plan than under the original confirmed plan.
The key changes meant to ease things up financially in a Chapter 7 and Chapter 13 bankruptcy are:
- Creditors should be aware to file a timely Notice of Payment Change if loan payments due are modified under Bankruptcy Rule 3002.1. If a debtor is paying mortgage payments directly to the creditor, Chapter 13 creditors will need to work directly with debtors to agree upon a loan modification, forbearance, or deferment.
- Borrowers who have been affected by COVID-19 with federally-backed mortgage loans can request a forbearance from mortgage payments for up to 180 days. The CARES Act also provides protection for tenants from eviction if the owner applies for a forbearance.
Laid Off Due to COVID-19? Bankruptcy Can Help
No one wants to file for bankruptcy. But if you’re one of the millions laid off because of the coronavirus pandemic, it might make sense to file for bankruptcy—especially if you’re struggling with debt.
The main goal of filing for Chapter 7 bankruptcy is to discharge debts. A discharge releases individual debtors from personal liability for the debt and prevents that creditor from taking any collection actions against the debtor.
Although a debtor is not personally liable for discharged debts, a valid lien in the bankruptcy case can still remain. Therefore, a creditor may enforce the lien to recover the property. For example, the discharge will wipe out your obligation to pay your car loan, but the lender will use its lien rights to repossess the vehicle and you will not get to keep the car. Keep in mind, during a Chapter 7 bankruptcy, you will have to give up luxury items, such as a vacation home, an expensive diamond necklace, or a valuable coin collection in exchange for a debt discharge.
In most cases, Chapter 7 bankruptcy filers automatically receive a discharge at the end of their case and the court usually grants the discharge 60 days after the 341(a) Meeting of creditors. At the end of your case, the bankruptcy court will discharge all qualifying pre-petition debt, such as credit card balances, personal loans, and medical debt that arose before the date of filing for Chapter 7. However, the court will not discharge a post-filing debt. Therefore, a debtor will remain responsible for paying balances that incur after the initial filing date, even though their bankruptcy case isn’t over. https://www.nolo.com/legal-encyclopedia/debt-discharged-chapter-7-bankruptcy.html
Qualifying for Chapter 7 Bankruptcy After a Layoff
A debtor must take the bankruptcy “means test” to find out whether their income is low enough to file for Chapter 7 bankruptcy. Essentially, this is a formula designed to keep high wage earners from filing for Chapter 7 bankruptcy. Taking the Chapter 7 means test does not mean that you must be penniless to use Chapter 7 bankruptcy. You can earn a decent income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses, such as a high mortgage and car loan payments.
To qualify for a Chapter 7, your income must be at or below the median income for your state to be eligible for a Chapter 7 discharge. However, there are two exceptions:
- If your gross income is too high, you may use the second portion of the means test to qualify, which allows you to deduct certain expenses.
- If most of your debts are business-related, you’ll be exempt from the means test.
In many cases, Chapter 7 bankruptcy is a better fit than Chapter 13 bankruptcy as Chapter 7 is quicker, many filers can keep all or most of their property, and filers don’t pay creditors through a three-to-five-year Chapter 13 repayment plan. Hiring a Chapter 7 and Chapter 13 lawyer will give you a better idea of which chapter to file.
High-income filers who do not qualify to take the means test can file for Chapter 13 bankruptcy to repay a portion of their debts, but they will not be able to use Chapter 7 bankruptcy to discharge their debts altogether. https://www.nolo.com/legal-encyclopedia/chapter-7-bankruptcy-means-test-eligibility-29907.html
Consult With a Bankruptcy Lawyer
If you’re considering filing a COVID-19 bankruptcy, it’s important to speak with a bankruptcy lawyer as soon as possible. The bankruptcy attorneys at The Law Office of Ronald D. Weiss, P.C. can help you file for bankruptcy even if you’re quarantined during the coronavirus outbreak. We will help you file safely by consulting with you virtually and appearing at the 341 meetings of creditors by video or telephonically. Our Chapter 7 attorneys provide everything necessary to eliminate most or all of a client’s debt and will allow the client to obtain a fresh financial start.
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