As of December 2020, California’s unemployment rate rose to 9%, and the fallout from COVID-19 is far from over in 2021. It may be a long time before many industries recover, and many jobs are gone for good. The latest stimulus checks may bridge the gap for some, but for many debts are piling up and economic prospects remain uncertain. Many face losing their businesses or homes.
Bankruptcy is a last resort, but for some, it could be a second chance. You may even be able to keep your home and other personal property away from creditors.
Before deciding whether bankruptcy is in your best interest, you need to take stock and develop a financial plan. Mortgage, rent payments, and utility payments can often be deferred under the Tenant, Homeowner, and Small Landlord Relief and Stabilization Act without penalty, but you are still ultimately responsible for paying the full amount. Student loans are also currently deferred without interest, and you may be able to negotiate with other creditors, such as adding months on to the end of your car payment, which may give you some breathing room.
You may also be able to negotiate a lesser payment amount on some debts. Creditors know that getting some return on an investment is better than none, and bankruptcy can mean that they lose out. You will want to be upfront and realistic about your situation and what you can pay back in the long term. You need to assess each debt individually and look into your options with each creditor.
You will have to be proactive with reaching out to creditors: few of these options are automatic. For example, if you can’t pay your rent or mortgage, you will need to send a signed declaration of hardship to your landlord or mortgage holder. (For more on avoiding foreclosure or eviction, see our previous post “Eviction under COVID-19.”)
Can you defer debt and pay it off later, or is this only going to sink you into further debt? If you can negotiate a system of payments that will keep you afloat, great. Bankruptcy has a significant impact on your credit, although you can eventually build it back up with hard work and careful planning. However, it may be better to wipe the slate clean now and get a start on rebuilding your credit now.
Individuals (or married couples) usually file under “Chapter 7” or “Chapter 13” of the Bankruptcy Code. Chapter 7 is a “liquidation” bankruptcy and what you may commonly think of as bankruptcy: except for exempt personal property, everything you have left is sold off to satisfy your creditors. If you’ve been laid off due to COVID, you will probably file under Chapter 7. However, a Chapter 7 is not as bad as it sounds and has significant advantages over a Chapter 13.
Chapter 13 is sometimes called a “wage earner’s” bankruptcy and is for people who have a steady income and can pay some portion of your debt. In this case, you don’t forfeit any of your assets, but you have to commit to a repayment plan over the next 3 to 5 years: your discretionary income is calculated and all of it goes to your creditors for the duration of the bankruptcy. You will need to pay off all secured and “priority debts,” and the rest of your unsecured debt will split whatever you can pay over the rest of your payment period—which, in some cases, is nothing. You will need to undergo a “mean’s test” to determine whether you have the disposable income to meet the required payments for a Chapter 13, and there are also debt limits to qualify for Chapter 13.
If you qualify for Chapter 7, though, this is usually the better option anyway—a Chapter 13 bankruptcy usually pays more to your creditors than a Chapter 7 and it takes years to complete. Under Chapter 7, you can walk away with a clean slate in about 6 months. You can also exempt a fair amount of your personal property and, under the new California Homestead Exemption increase, possibly even keep your home.
Note, however, that a mean’s test examines your income over the last 6 months—so if your lay-off was more recent, you may need to wait a few months to qualify for Chapter 7. For more details on the bankruptcy process, see our previous posts on Chapter 7 and Chapter 13. Before moving ahead with bankruptcy, it’s a good idea to consult with an experienced California bankruptcy attorney who can assess your situation and find the best outcome: a sound financial strategy for facing your debts can save you a lot of money, and COVID keeps throwing new wrinkles into the options available, so be sure to have someone knowledgeable on your side, like the legal savvy of Greenacre Law.