You may be experiencing unemployment and considering bankruptcy. You are not alone. The number of Americans out of work is expected to grow exponentially in the coming months. Research released in March revealed that the unemployment rate could hit 32%, with the total number of unemployed Americans possibly hitting 47 million.
If you are like most people, the last thing you would want to do is file for Chapter 7 bankruptcy or Chapter 13 bankruptcy. However, if you are one of the millions laid off because of the COVID-19 pandemic, it might make perfect sense to consider filing for bankruptcy, especially if you are struggling with debt.
Without work, most Americans worry about their capacity to pay rent (alongside other bills) and buy other essentials such as groceries. A TransUnion online poll of over 3,000 adults revealed that a staggering 58% of Americans admitted they have already lost income because of the COVID-19 pandemic.
However, some experts believe declaring bankruptcy to wipe out your debts may not always be the best option. If you are considering filing for bankruptcy because of the global pandemic, you must understand the process, the steps you need to take, and the best option available for you.
Understanding Your Options
When your debt is spiraling out of control, you fundamentally have three options:
- Pay only the minimum amount on your bills and tough it out as long as possible until you find work again.
- Negotiate some settlement with your creditors.
- Work with a debt management company.
- File for bankruptcy.
What most people don’t realize is it is usually not ideal to opt for bankruptcy straight away. Instead, it would be best to first work something out with your bank or creditors and see if you can lower or put off payments, at least for the time being. You may consider debt management vs debt settlement. One of the caveats with debt settlement is that your accounts generally go delinquent before they settle. Collection agencies may employ companies to sue on unpaid debt. It’s possible that a collection agency sues for $5,000 in debt. It is reassuring to know that most people can get back on their feet without filing for bankruptcy.
Getting in Touch with Creditors
Lawmakers, regulators, and even banks are rolling out several assistance programs consumers can take full advantage of. For instance, the $2 trillion Congressional relief package gives homeowners experiencing financial challenges the option to request up to 180 days of forbearance on their mortgage.
Many established credit unions and banks have set up hardship programs, student debt payments, and auto loans, as well as a delay of credit card payments until you can get back on your feet. If you’re being impacted, get in touch with your creditors and inform them of any help you need. It is also advisable to ask for help as soon as possible before you start incurring late fees.
The idea is to be proactive. Nowadays, many companies are foregoing late fees, suspending mortgage and rent payments, and arranging unique payment plans. When asking for forbearances, it is recommended that you keep a thorough record of the conversation you have with the customer service representative, including the details of the terms offered as well as the representative’s name.
For those with private loans, the level of assistance available can vary. You may not even get the full 180 days. In similar scenarios, consider accepting forbearance that’s offered to you so you can get some breathing room.
Taking Additional Actions
Deferment and forbearance programs will only last so long. Eventually, you will be required to pay your dues. It is crucial to keep in mind that some creditors may require that you pay all your missed payments.
If you are already required to pay your bills, and you are still struggling, it might be the perfect time to ask your creditor for long-term relief options such as monthly payment amount or lower interest rates.
If you have an underwater mortgage, you can apply for a loan modification that will rework the terms of your mortgage. Usually, when approved, you can reduce the monthly payment to a more affordable amount. This step will require that you file the needed paperwork with your loan servicer.
While you can self-submit your application, you also have the alternative to work with an attorney who specializes in similar cases. If you hire an attorney, you need to pay a flat rate of $2,500 to have the necessary paperwork compiled and processed.
For credit card debts, negotiating a settlement or debt management plan is recommended. Work with a non-profit debt counselor to have all your outstanding debts consolidated into a single monthly payment that you can pay off over three years. Typically, your counselor will negotiate a low-interest rate for you while you are still in the process of paying off your dues.
Filing for Bankruptcy
If you end up filing for bankruptcy, there are two types you can file as an individual: Chapter 7 and Chapter 13.
A Chapter 7 bankruptcy will involve selling any valuable assets (i.e., vacation home, stocks, bonds, collectibles, vehicles, etc.) to pay off all your debts. A Chapter 7 bankruptcy wipes out all of your outstanding debts once a judge has approved your filing in court. The whole process can take around three to five months.
Chapter 7 bankruptcies are considered ideal for those who cannot pay a significant portion of their dues. Also, Chapter 7 bankruptcies should only be filed if you have an unmanageable amount of unsecured debt such as credit card or medical debt.
A Chapter 13 bankruptcy is also known as a reorganization bankruptcy. It is designed for people with regular income. In essence, it is a plan to repay a part or all of your debts in installments. Chapter 13 bankruptcy works very well if you are far behind on your home mortgage payments, and you are facing a possible foreclosure or eviction.
With a Chapter 13 bankruptcy, you are not required to sell off your properties to pay your lenders. Instead, you will work to pay off your debts through a consolidated repayment program that’s court-approved. The unified repayment program will typically run for a period of three to five years. At the end of the period, any unpaid debts remaining are discharged.
For both Chapter 7 and Chapter 13 bankruptcies, you must go to court and have a judge sign off various aspects of your case. Fortunately, many federal courts are still open despite the pandemic. However, most are not holding in-person hearings. Most courthouses are also closed to the public.
Making Things Right
Debt can sometimes feel like an albatross around your neck. But you should not be embarrassed that you are taking steps to rectify it through bankruptcy. Also, don’t hesitate to consult an attorney to assess if it is the best option.
Filing for bankruptcy is not the end of your financial life. Rather than viewing bankruptcy as a failure, look at it as a step that can provide the financial relief you need, given that it is done right.
