New Bankruptcy Laws as a Result of COVID-19

After the initial shock of the COVID-19 outbreak and the resulting global pandemic, many believed that the public health crisis would pass, and the economy would bounce back quickly. More than a year after the U.S. saw its first COVID-19 case, the economy is finally on track for strong growth, but the financial impact of the coronavirus crisis is still being felt across the country. As more businesses are forced to close their doors due to COVID-19 and American workers still find themselves out of work or making less than they did before, many unemployed people and struggling small business owners are seeking bankruptcy relief as a solution to their overwhelming debt. Changes made to the U.S. Bankruptcy Code in response to the ongoing coronavirus pandemic have made it easier for individuals and businesses to file bankruptcy during the uncertain economic climate brought on by COVID-19. Call us today to learn more about how to seek bankruptcy relief due to COVID-19.

Bankruptcy for Small Business Owners

Despite efforts to counteract the impact of COVID-19 on American businesses, many small business owners in the U.S. continue to face ongoing challenges stemming from the coronavirus outbreak and subsequent pandemic. Filing for bankruptcy is one way struggling small business owners can either stay afloat in the wake of the COVID-19 pandemic and keep their business operations going or close their business quickly and efficiently. The three main types of bankruptcy that may be available to small business owners seeking bankruptcy relief due to COVID-19 include:

• Chapter 11 bankruptcy, which offers small businesses the opportunity to restructure their finances and create a plan to repay their debts while remaining open.
• Chapter 7 bankruptcy, in which case the company stops all operations and goes out of business. The business’ assets are liquidated, and the proceeds are used to pay off outstanding debts.
• Chapter 13 bankruptcy, which may be available to sole proprietors who want to reorganize their personal and business debts. make monthly payments to creditors through a Chapter 13 repayment plan and keep the business afloat.

Bankruptcy for Unemployed Individuals

The coronavirus pandemic dealt a devastating blow to American workers across the country and across all sectors. In the thick of the COVID-19 outbreak, businesses were forced to close their doors, the U.S. economy plunged into a recession, and the U.S. unemployment rate reached record highs. Millions of workers found themselves dealing with some form of job loss – either a temporary layoff, a furlough, or a dismissal – with no idea when they would return to work, if at all. Many of these workers who suffered drastic pay cuts or total income loss during COVID-19 are now seeking relief through bankruptcy. If you lost your job as a result of COVID-19, you may be wondering if unemployment could prevent you from filing for bankruptcy and which type of bankruptcy case is right for you. There are pros and cons to seeking relief under Chapter 7 or Chapter 13 of the Bankruptcy Code, which is why it is important to speak to a qualified bankruptcy attorney before moving forward with a bankruptcy filing.

Chapter 7 vs Chapter 13 Bankruptcy

When you file a Chapter 7 bankruptcy case, your assets are liquidated, the proceeds are used to pay back your creditors, and your debts are discharged. Chapter 7 bankruptcy is typically reserved for debtors with little or no income, in which case being unemployed may actually help you qualify. If you find yourself unemployed as a result of COVID-19, filing Chapter 7 bankruptcy could be a good opportunity to wipe out your debts before you find a new job. By contrast, debtors who want to keep their property and pay back their creditors over time may benefit more from a Chapter 13 debt relief plan. However, this type of bankruptcy case requires debtors to have enough income to make monthly payments under a court-approved payment plan, which means most unemployed individuals will not qualify, even those receiving COVID-19 unemployment benefits. There are some exceptions, however. If you have other sources of income, such as a pension, Social Security or disability benefits, or income from a rental property, and you can show that you can afford to make the necessary monthly payments, you could qualify for Chapter 13 bankruptcy even during a period of unemployment.

COVID-19 Bankruptcy Relief Provisions Extended

The Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law on March 27, 2020, included several coronavirus-related bankruptcy relief provisions that were set to expire in March 2021. On March 27, 2021, President Biden signed the “COVID-19 Bankruptcy Relief Extension Act of 2021,” which preserved those bankruptcy relief provisions for another year, through March 27, 2022. The new bill includes the following provisions for personal and small business bankruptcy cases:

• Preserves the debt eligibility threshold of the Small Business Reorganization Act of 2019 at $7.5 million for businesses filing for bankruptcy under Subchapter V of Chapter 11 of the U.S. Bankruptcy Code.
• Amends the definition of “income” for Chapter 7 and Chapter 13 bankruptcy filings to exclude coronavirus relief payments distributed by the federal government.
• Excludes federal coronavirus relief payments from being included in the calculation of disposable income for the purposes of confirming a Chapter 13 repayment plan.
• Allows individuals and families currently in Chapter 13 bankruptcy who are experiencing a financial hardship as a result of COVID-19 to seek modifications to their bankruptcy repayment plan, including extending their plan to seven years.

Filing for Bankruptcy During COVID-19

For many people grappling with the economic crisis caused by the COVID-19 pandemic, bankruptcy offers a much-needed lifeline, a way out from under significant debt, and a second chance to get their finances in order. Unfortunately, there is a stigma surrounding bankruptcy that keeps many people from getting the help they need to deal with their overwhelming debt. If you are struggling with debt due to COVID-19, your best course of action is to consult a knowledgeable bankruptcy attorney to discuss your options. With an experienced attorney on your side, you can determine whether filing for bankruptcy is the right move for your specific financial situation and learn about the different types of bankruptcy available to you.