Since the COVID-19 Pandemic began, the U.S. economy has lost millions of jobs. People everywhere have been struggling to find their way through these turbulent times. The government is doing its best to help by passing various Covid related relief measures including stimulus checks and unemployment benefits to those in need. Despite the federal and state government’s best efforts to curtail the need for bankruptcy, many people are finding themselves in dire straits. Foreclosure and eviction forbearances will soon be lifted. Unemployment funds will run out. If you still have not found employment or your employer has not brought back the hours you were once earning pre-pandemic, how can filing bankruptcy help you? Below are some of the factors you may be considering when contemplating whether bankruptcy is right for you.
If I do need a bankruptcy, which chapter do I file?
Deciding which chapter of bankruptcy to file is a very important decision to make. Many factors will lead you to the right decision. As always, I encourage anyone thinking about bankruptcy to consult with a competent bankruptcy lawyer to ask all the legal questions and seek advice about bankruptcy before doing anything else. With that being said, here are several good questions to help you get started.
Do you have assets you want to save like your home and/or car?
If your answer is “yes” I own my home and/or car and I want to make sure I can save these items through the bankruptcy process, then find out how much you owe and whether there is equity available above what you owe for each of these assets you own. If you have equity in your home or car, make sure you ask your bankruptcy lawyer whether the equity you have meets or exceeds your exemption amount available to you. Exemptions are laws that protect your property through bankruptcy. If your equity is above what is allowed by law through your exemption, then you may need to look more towards chapter 13 rather than chapter 7. If not, then chapter 7 is still an option. As a bankruptcy lawyer, I always do my best to put clients in chapter 7 unless or until it becomes no longer an option.
If you do own your home and/or car, are you current on those payments, assuming you want to keep these assets?
If you are behind on mortgage payments or car payments, chapter 13 may be a better option. Chapter 13 allows you to make up those late or missed payments over time while keeping you current in the eyes of your lender while you are in chapter 13. If you don’t want to keep these assets, then chapter 7 may still work for you. You can return or surrender your car through a chapter 7 bankruptcy. Any debt still owed on the car will be covered by your bankruptcy discharge. I recommend holding onto the car until your case has been filed. This will keep you from incurring both repossession and a bankruptcy on your credit report after bankruptcy.
Calculate your annual income.
All bankruptcies have a test called the “Means Test” which determines whether you qualify for chapter 7 or chapter 13 based on your annual income. Let your bankruptcy lawyer know what your income is ahead of time so there are no surprises (hopefully) later on about not qualifying for chapter 7. If your income is too high to qualify for chapter 7, then you may be forced into filing Chapter 13. Income includes money coming into the household from all sources including employment, unemployment, disability (VA and SSI), and anything else. If you have been on unemployment for the past several months but have a job coming back or new employment, now may be a better time to file because your income was lower while you were on unemployment. Once employed, if your income substantially increases, it may jeopardize your ability to qualify for chapter 7.
Where are you at with your mortgage or rental lease?
Are you under threat of foreclosure or eviction? Are you on a mortgage forbearance? These questions should be brought to your bankruptcy lawyer’s attention immediately so you can protect your home. Whether you are in foreclosure or eviction proceedings, bankruptcy may be able to help you stop you from losing your home. Many people have been affected by Covid with mortgages in forbearance and renters using the eviction moratorium to stay in their homes. It may be better to act now and file bankruptcy before these moratoriums are lifted. Once lifted, mortgage lenders and landlords are no longer forbidden from requiring homeowners and tenants from paying back missed payments in full or face foreclosure or eviction. Do not procrastinate hoping something or someone will be there to save you and your home.
The bottom line
The best advice is to talk to a professional about your situation and get good advice. Bankruptcy is not for everyone, but it can be the path to a fresh start for anyone who has been affected by Covid-19. Job loss and income reduction have been hard on many people. The aftermath of Covid-19 is just beginning. The economy looks promising, but for many, the hole is just too deep to dig your way out. Bankruptcy can help.
What if I own a business, can I file a business bankruptcy?
A chapter 7 business bankruptcy is similar to personal bankruptcy with one distinct difference: business bankruptcy debtors do not get a discharge in a business chapter 7 bankruptcy. A discharge is the court order which allows all of a personal bankruptcy debtor’s credit obligations to be legally forgiven. Obtaining a discharge is the main reason why people file for bankruptcy. It is the relief that gives bankruptcy filers the fresh start needed to start their credit over with a clean slate. However, in chapter 7 business bankruptcy, the process for getting started is similar to personal bankruptcy, but the end result is the business is wound down and closed at the end rather than debts being discharged. A chapter 7 business bankruptcy means you are going out of business. All assets owned by the business will be sold or liquidated. Money obtained from the sale(s) and liquidation will be used to pay towards business debt. Once the assets are sold and the money is paid, business creditors can no longer pursue the business for anything more as there will be nothing left.
What other options does the business have?
The other option similar to a personal bankruptcy chapter 13 would be a chapter 11 bankruptcy. There is also a newer version of chapter 11 called Subchapter V of Chapter 11 bankruptcy. Both of these bankruptcy options can be used to help businesses reorganize their creditors into a payment plan to be paid monthly until the business can “reemerge” itself from bankruptcy by proving it can once again stand on its own and continue operations. Chapter 11 bankruptcy laws are extremely complex. It is highly recommended that you seek out an experienced and competent chapter 11 bankruptcy lawyer if you find that this is what you need to do.
What if I “personally guaranteed” any of the business credit debt?
In my experience, it is very difficult to obtain business credit that is solely guaranteed by the business. In almost every case, the business owner personally guarantees the debt. Often, the business owner does not even realize this has been done. It is only after reading the credit contract thoroughly that we realize the business owner has personally guaranteed the loan. A personal guarantee means that the creditor or lender has the right to demand payment from either the business or the business owner personally. If your business is failing or has no assets, the only recourse the creditor may have is to demand payment from the business owner and require that payment to come from assets personally owned by the business owner. Additionally, creditors often make a requirement of the credit extension that the business owner’s personal guarantee will be used even before attempting to get payment from the business itself. Any credit obtained by the business that is personally guaranteed will not be forgiven as to the business owner in business bankruptcy. Therefore, as a business owner, you may end up in need of filing personal bankruptcy, a business bankruptcy, or both depending on your circumstances. Talk to a bankruptcy lawyer to determine which course of action would be best for you.
Can I keep any business assets, if I file a business chapter 7?
Generally, the answer is “no”, but there may be some exceptions. There are exemption laws that protect certain items like “Tools of the Trade” which may include tools or other items that are needed specifically for the business’ operations. For example, if you are an auto mechanic and you own a set of tools you use to operate your business to work on car repair, you may be able to keep your tools even though you filed a business bankruptcy. Make a list of all the assets the business owns or uses, then talk to your bankruptcy lawyer about which, if any, of these assets can be protected through your bankruptcy filing. Generally, anyone who files a chapter 11 or Subchapter V will keep the business and all the business’ assets unless the business decides to surrender or give back the asset to the lender.
Additionally, you may be able to “reaffirm” some items. Going back to my prior example, say you financed your tools when you bought them. You may be able to reaffirm that debt so you can keep the tools. Reaffirm means that you sign an agreement with the lender through your bankruptcy to continue making the required monthly payment from the original contract you signed when you bought the tools. As long as you remain current on those payments, you likely would be able to keep the tools. In this example, you may be able to keep your tools, which may assist you to find a job as an auto repair person after your bankruptcy is over.
Are There Any Special Provisions for Bankruptcy Filers During or After Covid-19?
Generally, there are not many special provisions for bankruptcy filers due to Covid-19. There are restrictions on meeting in person, so the court and trustee hearings have been held by phone or on Zoom video. This will continue in Arizona until at least June 30, 2021. The length for chapter 13 plans of reorganization may be extended for chapter 13 debtors who filed their case prior to the pandemic. The courts have waived original signature requirements for certain documents that required original signatures prior to the pandemic. The CARES-Act has restricted how creditors can access stimulus funds and has forbidden bankruptcy trustees from having access to those funds as well in some versions of the CARES-Act. However, the government is continually restructuring the CARES-Act and has been affording more and more relief to many people including bankruptcy filers. It also looks more promising than the government will soon be offering student loan debt relief in various forms. The president has already discharged student loan debt for many people such as those who are disabled and those who were defrauded by their educational institution. Maybe someday in the future, the government will allow student loans to be discharged in bankruptcy again. If that were to happen, I believe the wave of bankruptcy filers would increase substantially.
The decision to file bankruptcy in any form and under any chapter should be thought out thoroughly and carefully. There are many factors in today’s economy that may have you considering filing bankruptcy. I encourage you to do your research, make a list of any questions you have about filing bankruptcy, and contact Jim Gaudiosi, Attorney at Law at 623-777-4760 to schedule a free consultation. I am happy to talk to you about your situation and offer guidance about how to proceed whether bankruptcy is right for you or not.