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?
Remember, filing bankruptcy allows you to eliminate your debts - credit cards, car loans, bank loans, medical bills etc. While eliminating these payments will inevitably help your household budget, it won’t change the here and now.
You’ll still be responsible for rent, utilities, insurance, groceries and really all other living expenses. Remember, filing bankruptcy does not change your income. If you made $0/mo. before filing your case, you’ll still be making $0/mo. afterwards. This means that simply stopping paying your unsecured debt so you can make sure your necessities are taken care of will have the same short-term effect as a bankruptcy filing.
Let me illustrate what I mean with an example:
Debbie, a single woman working in the hospitality industry was doing alright, taking home a net income of $2,500/month. Last week, Debbie was laid off. Debbie was able to apply for and start receiving unemployment income of $240 per week or $1,040 per month. Her monthly budget changed as follows:
Option 1: Debbie holds off on filing bankruptcy for now, but stops all credit card payments. Debbie knows she can’t make her credit card payments anymore - she is barely able to figure out a new budget that allows her to keep up with rent, utilities and food. She is considering filing Chapter 7 bankruptcy to help deal with this shortfall.
Option 2: Debbie decides to file for Chapter 7 bankruptcy and, as a result, stops all credit card payments.
Regardless of which option Debbie chooses, her new monthly budget will look like this:
Her monthly expenses exceed her income by $860/mo. Filing Chapter 7 bankruptcy will not increase her income. It will not help her deal with the $860/mo. shortfall. In fact, it won’t change her current situation at all. Since filing a Chapter 7 will provide Debbie neither immediate relief from financial distress nor a fresh start, it’s probably premature for Debbie to file Chapter 7 bankruptcy now.
(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 tens 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. This is especially true because the CARES Act does not include an exemption for the stimulus payment. This means that folks filing Chapter 7 bankruptcy before receiving the stimulus funds risk losing this money.
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.
Take the time you need to take stock and investigate your options. Then make your decision based on what’s best for you instead of rushing into a bankruptcy filing just because it seems like the only thing you can do.
Hang in there and stay safe!