The current COVID-19 outbreak has caused massive layoffs and work shortages here in Alabama, just like everywhere else. Stores are closed, bars and restaurants aren’t making any money, and you can’t find the good toilet paper anywhere. Congress did finally pass an emergency bailout bill, but even getting an extra $1,200 won’t be enough to cover your lost wages, especially if you were working in a bar, restaurant, or store. A LOT of bankruptcy lawyers are amping up their advertising, hoping to convince you to go ahead and file for bankruptcy before your creditors start hounding you for the money. But I’m here to tell you to wait. Stay calm and think about this first. At least consider these three things before you rush into a bankruptcy lawyer’s office:
The Bailout Bill has increased unemployment benefits that you may be able to take advantage of to weather the storm. Part of the Coronavirus bailout bill is a federally funded $600/week bonus that you can get on top of your normal state unemployment benefits, AND an additional 13 weeks of unemployment. So if you’ve found yourself unemployed, go ahead and apply for unemployment benefits and see if that will get you enough to cover the next couple of months.
You May Fail the Chapter 7 Means Test. In order to qualify for a discharge in Chapter 7 bankruptcy, you have to provide your past six months’ pay stubs to the Bankruptcy Trustee and undertake a rigorous monthly income and expense calculation to show that, based on your most recent income, you can’t afford to pay your creditors in Chapter 13 (debtor’s reorganization). The mathematics are actually quite complex, but suffice it to say that if your past six months’ income was higher than the median in your state and you don’t have a lot of allowable expenses (like child support or secured debt payments) you could be forced into Chapter 13 instead, which requires you to devote 5 years of payments to your creditors. Because the means test calculation is determined mechanistically based on your past six months’ pay stubs, you could fail the means test even if you are currently unemployed! The wiser strategy in many instances may be to wait until you’ve been unemployed for a couple ofmonths and then file Chapter 7 when your 6 month average income is lower. Chapter 13 is fine for many cases, but it usually ends up being more expensive than Chapter 7 and it takes years to complete, as opposed to a few months.
Many mortgage companies are suspending foreclosures during the pandemic. Fannie Mae and Freddie Mac recently announced that they are suspending foreclosures until the end of April, and that date could possibly be extended in the future, depending on how long the nation remains in crisis mode. Most home mortgages in this country are backed by Fannie and Freddie, so if you fall behind on your mortgage payments, you may be able to find relief from foreclosure without resorting to Chapter 13, which is the traditional legal remedy for those seeking to stop a foreclosure. Most bankruptcy lawyers pitch the ability to stop a foreclosure as one of the chief benefits of Chapter 13 (and it is indeed a powerful remedy), but why take such a drastic step if you can avoid it by taking advantage of their voluntary programs? The bottom line is this: if foreclosure is the main reason you’re considering bankrupcy, don’t make a rush decision. See if your lender is one of the lenders that are stopping foreclosures right now. Apply for a hardship loan modification.
Finally, I need to point out one situation that may require you to file bankruptcy: if you are facing a repossession. Unlike the mortgage companies, auto lenders are generally much less generous when it comes to providing relief from repossessions. Foreclosures are slow and costly, so the mortgage companies have a financial incentive to avoid them if they can. Repos, however, only cost the lender a few hundred dollars and provide immediate value in the form of your car. As far as I know, the Coronavirus Bailout Bill did not provide any relief from repossessions (though in my opinion, something like this should have been included in the bill, which is mostly just a massive corporate welfare spending spree). So if you are behind on your car note and your vehicle is out for repossession, you may indeed need to file for Chapter 13 to keep your car.