How COVID-19 impacts personal bankruptcy issues

The presence of COVID-19 in the United States has created significant financial, legal, and social issues, many of which seem to change day-by-day. It is no secret that many Americans are losing jobs at breakneck speed. Some are faced with the unfortunate reality that they may need to file for bankruptcy.

In general, filing for bankruptcy is a big step, and most people don't want to file unless there's no other option. Consumers faced with this difficult decision should first seek the advice of an experienced bankruptcy attorney.

Chapter 7 vs. 13 bankruptcy

There are two forms of bankruptcy options available to individuals, depending upon the amount of money they make. Chapter 7 and Chapter 13 of the United States Bankruptcy Code offer indebted individuals a way to start over entirely or, alternatively, to pay down outstanding debts over time.

Under Chapter 7:

• An automatic "stay" will be issued, and, while in place, the collection calls immediately come to a halt.
• A bankruptcy trustee is appointed to gather, itemize and sell any additional property and distribute the proceeds of the sale to creditors.

One major drawback to filing for Chapter 7 bankruptcy is that it will remain on an individual's credit report for seven years.

If an individual has fallen behind on common monthly expenses, yet still has enough income set aside to recover over time, Chapter 13 might be the preferred avenue.

Under Chapter 13:

• The individual enters into an agreement with creditors to pay them back.
• Assets and debts or reorganized, and a payment plan is put in place for either three or five years.

While that can sound like a win-win for both individuals and creditors, it does come with a cost—a Chapter 13 filing remains on a person's credit report for 10 years.

How will COVID-19 affect bankruptcy in the long term?

The long-term effects of COVID-19 have yet to be fully realized, but there is no relief in sight for many individuals.

For those who are unemployed and without any reasonable estimate of when the job market may return to pre-coronavirus status, filing for bankruptcy may be the only logical option. It seems likely that bankruptcy courts will be flooded with consumer bankruptcy filings for the foreseeable future.