One of the most devastating issues stemming from the COVID-19 outbreak and the global pandemic that ensued has been the loss or significant reduction in income that left many households and businesses facing financial insecurity. The economic fallout from COVID-19 has been far-reaching and long-lasting, and many individuals, families, and businesses across the country have consequently found themselves with little choice but to file for bankruptcy.
If you are considering seeking protection under the U.S. Bankruptcy Code, you probably have questions about bankruptcy in COVID-19 and how the bankruptcy laws have changed over the past year and a half. You may still be concerned about the stigma surrounding bankruptcy and wonder how filing for bankruptcy could affect your reputation and your economic status. Deciding whether you should file for bankruptcy can be confusing and stressful, but that shouldn’t stop you from taking the necessary measures to protect yourself and your financial future.
Filing for Bankruptcy During COVID-19
The social-distancing restrictions and stay-at-home orders put in place in the wake of the COVID-19 outbreak shuttered many small businesses and entrepreneurial ventures and left others hobbling along, trying to keep their heads above water, with no clear idea if or when they would bounce back from the crippling losses in business activity they suffered. And while there is no doubt that small businesses were among those hardest hit by COVID-19, American workers were no better off. U.S. unemployment rates hit a record high during the pandemic, rising above even those stemming from the Great Recession, when the number of unemployed Americans rose by 8.8 million from late 2007 to early 2010.
For many people dealing with long-term unemployment or a significant disruption of business activity due to COVID-19, filing for bankruptcy has emerged as the best solution for dealing with their debt and improving their financial situation once and for all. Bankruptcy is a legal process by which individuals, corporations, or small businesses who are unable to repay their debts to creditors can seek relief from some or all of the debts they owe.
Bankruptcy can help those struggling under the weight of un-payable debt by either discarding their debt or initiating a plan to repay the debt over time. Depending on the debtor’s status as an individual or business, there are several different ways to seek relief under the U.S. Bankruptcy Code, which is the law that governs the procedure debtors must follow when filing for bankruptcy. The most common types of bankruptcy in the U.S. are covered by Chapter 7, Chapter 13, and Chapter 11 of the Bankruptcy Code.
Chapter 7 Bankruptcy – Liquidation
The most common form of bankruptcy in the U.S. is Chapter 7 bankruptcy, also known as liquidation. Debtors who seek protection under Chapter 7 of the Bankruptcy Code are typically individuals who don’t have the means to make payments toward their debts. When a debtor files a petition for Chapter 7 bankruptcy, a bankruptcy trustee is appointed to liquidate the debtor’s assets and distribute the funds amongst the creditors. Business can also file Chapter 7 bankruptcy if they choose to terminate their business operations.
Chapter 13 Bankruptcy – Reorganization
An alternative to Chapter 7 bankruptcy is Chapter 13, also known as reorganization bankruptcy. Chapter 13 bankruptcy gives the debtor an opportunity to reorganize their finances and pay creditors over time under a court-approved repayment plan. In most cases, Chapter 13 bankruptcy is reserved for debtors who have the disposable income necessary to pay their bills and repay all or part of their debts within a three- to five-year period.
Chapter 11 Bankruptcy – Business Reorganization
Chapter 11 bankruptcy permits struggling businesses to reorganize their debts and assets and create a plan to address their outstanding financial obligations while continuing business operations. Subchapter V of Chapter 11, or small business debtor reorganization, went into effect in 2020 and streamlines and expedites the Chapter 11 bankruptcy process for small business owners to pay down their debt.
Coronavirus-Related Changes to Bankruptcy Rules
More than a year after the COVID-19 outbreak first struck the United States, American workers and businesses continue to face considerable challenges due to the unprecedented economic fallout from the pandemic. In an effort to address these ongoing challenges, Congress has made several temporary changes to the Bankruptcy Code aimed at providing additional relief for individual and business debtors during COVID-19. One of the new coronavirus-related bills signed into law earlier this year is the “COVID-19 Bankruptcy Relief Extension Act,” which extends the existing provisions meant to provide relief to debtors in bankruptcy, including those bankruptcy cases related to the coronavirus pandemic.
COVID-19 Bankruptcy Relief Extension Act
In March 2021, President Biden signed the COVID-19 Bankruptcy Relief Extension Act to make it easier for individuals and businesses struggling financially during the ongoing COVID-19 pandemic to seek protection under the Bankruptcy Code. The Act extends through March 27, 2022, the personal and small business bankruptcy relief provisions introduced as part of the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act. Under the extended Act, more businesses can qualify for bankruptcy under Subchapter V of Chapter 11, plus Chapter 7 and Chapter 13 debtors are permitted to exclude coronavirus-related payments when calculating their income for the purposes of filing bankruptcy or confirming a repayment plan. Debtors currently in Chapter 13 who are experiencing a coronavirus-related financial hardship are also able to seek modifications to their payment plan under the new bill, including extending their payments for up to seven years after the date the initial debt payment was due.
Knowing When to File for Bankruptcy in COVID-19
The initial impact of the COVID-19 crisis on the American economy was widespread, and it is anticipated that individuals, families, and businesses nationwide will continue to experience financial hardship due to the coronavirus pandemic. With so much uncertainty surrounding the COVID-19 crisis and what it could mean for the nation’s economy, American workers, and small businesses moving forward, many are asking themselves if seeking protection under the Bankruptcy Code is the right choice for the sake of their financial future. Filing for bankruptcy is an important decision, one that should not be made lightly. It is also a powerful debt-relief tool when used in the right way at the right time. Contact us today for more information about bankruptcy in COVID-19 and how and when to file.