I Lost My Income Due To Covid - Should I File Bankruptcy?

As we all navigate the COVID-19 outbreak and resulting global pandemic, the single biggest impact being felt by every-day Americans is the loss or significant reduction of household income. With so much uncertainty about so many things surrounding the Coronavirus outbreak, many are stressed and worried about their finances and trying to plan ahead. So, let’s look at some questions to ask yourself when deciding whether filing bankruptcy RIGHT NOW is the right choice for you. 

(1) What relief is available under the CARES Act? 

Depending on your situation, you may only need a bit of a stop gap to get yourself, your family, and - if you’re self employed - your business through this. To that end, make sure you know how the provisions of the recently passed CARES Act may benefit you. In addition to the $1,200 stimulus payment for individuals making less than $75,000 per year, the Act includes provisions for extended unemployment insurance through the state as well as certain loan programs for small business owners and independent contractors. Make sure you consider all of these programs before moving forward with a bankruptcy filing.  

(2) Will filing bankruptcy now actually improve your situation?

If you made $0/mo. before filing your case, you’ll still be making $0/mo. afterwards. Here is an example of how to tell whether right now is the best time to file bankruptcy.

More on that - including an example on how that could possibly be - can be found here.

(3) If the result is the same either way, why not just file and get it over with? 

This is a reasonable question, especially considering the fact that you may have some extra time on your hands to do the work required to file a Chapter 7 bankruptcy case. But, filing bankruptcy is an important decision and simply having the time to get it over with is rarely a good enough reason to do it. 

❗❗ The most important point to remember is this: Once you get a Chapter 7 bankruptcy discharge you cannot get another Chapter 7 discharge for another 8 years! So, getting it over with now will significantly limit your debt relief options for years. ❗❗

(4) Why does it matter that I can’t file again for 8 years?

It matters because you - like the rest of us - don’t know what will happen in the next few weeks or months. If you end up falling ill with COVID-19 and there is no government mandate that all medical bills for treatment related to the outbreak are covered by Medicare, you’ll be on the hook for whatever your insurance doesn’t cover. This could be 10s of thousands of dollars in medical bills the hospital and its various providers will try to collect from you for years to come. 

Even if you’re not worried about falling ill, consider how you’re going to make ends meet over the next few weeks or months. As illustrated by the example above, filing bankruptcy now doesn’t necessarily mean you’ll be able to afford your living expenses. Any new debt you incur just trying to get by until your income comes back to where it was will not be eliminated if you’ve already filed bankruptcy. 

(5) There are other risks to filing now

As mentioned, filing bankruptcy is a big deal. Most folks who end up filing do so only as a last resort and after learning as much as they can about the pros and cons of filing Chapter 7 bankruptcy. If you make a fear-driven decision to file quickly/right now, you may not truly realize what you’re getting yourself into. 

What happens when a Chapter 7 bankruptcy case is filed? 

The filing of a voluntary petition for bankruptcy relief under Chapter 7 of the Bankruptcy Code triggers several events that will impact both the success of the case and the financial position you’ll find yourself in once your case is over. 

Making sure you qualify for Chapter 7 

This is something that you really should confirm before your case is filed. But, even if you file only a ‘skeleton’ petition initially, eventually you’ll have to complete the means test analysis to confirm that you don’t make too much money to be eligible for Chapter 7 relief. 

Since the means test is based on the last 6 months of income, you may not actually qualify yet, even though your income going forward is well below the median household income. This could result in your case being dismissed because a Chapter 13 is not possible either (due to the lack of sufficient income to fund a plan) and you end up right back where you started. Except now you have a bankruptcy filing under your belt and on your record and have spent money you don’t have paying the court filing fee. 

Understanding what’s at stake when it comes to assets

The basic premise underlying Chapter 7 bankruptcy is that creditors (like banks and credit card companies) receive funds if the filer owns property that is not protected from creditors. These protections come from state and federal laws called exemptions. A vast majority (more than 90%) of all Chapter 7 filers don’t own any property that isn’t protected. In other words, they don’t have to give up any of their possessions in exchange for getting their discharge. 

What creditors - through the bankruptcy trustee - can reach is determined by the date the case was filed with the court. This means that the rainy day fund you’ve been setting aside to deal with unexpected emergencies is at risk. If you can’t protect it with an exemption, the trustee will use the funds to pay your creditors and you won’t have access to your rainy day fund for ongoing living expenses now that you need it the most. 

Pre-bankruptcy planning is allowed!

While the phrase “pre-bankruptcy planning” may sound a little bit like something someone who is trying to game the system would do, it’s really not. Instead, it’s all about making sure you’re taking advantage of the protections available under law by planning ahead. Now, that doesn’t mean that folks don’t overdo it and get in trouble as a result. But the fact that someone else got in trouble for trying to game the system, doesn’t mean you shouldn’t take advantage of the protections you have available to you to take care of your family. 

So, think about it. Do you own property that may be considered luxury property and not protected by an exemption? Would your family be better off if you had to turn that over to your Chapter 7 trustee so it can pay down your unsecured debts? Or would your family benefit more if you sold the item for its fair market value and used the money to buy groceries and pay rent while you wait out the pandemic?

Conclusion: Knowledge is power, and patience is a virtue

It’s completely normal to worry about what will happen during these uncertain times. The best thing you can do for yourself and your family is what you’re doing right now: Read up on anything and everything that may be able to help. Our friends at the Consumer Financial Protection Bureau have been busy publishing a number of articles on how to protect yourself financially from the impact of the outbreak, the coronavirus and dealing with debt, and steps you can take to protect your credit during the pandemic. They’ve also published a page devoted solely to financial resources for consumers during this time. Additionally, if you're looking for help building new skills that can secure you a place in the economy of the future, check out the nonprofit SkillUp.

Don’t rush into a bankruptcy filing just because it seems like the only thing you can do. Given the uncertainty we live in, it’s better to keep this powerful debt relief tool in your back pocket for the time being. Remember, you won’t be able to get bankruptcy relief for years once your case is filed. 

Hang in there and stay safe!