COVID-19 and Personal Bankruptcies

The sudden loss of income due to the furloughs imposed in response to the COVID-19 pandemic have caught a lot of people with little financial cushion with which to weather the crisis. Thinking the situation temporary, many people turned to credit to make ends meet. 

However, the situation has gone on longer than any of us thought it would and more than a few of those "temporary" furloughs have turned out to be permanent. This will inevitably bring about a definite correlation between COVID-19 and personal bankruptcies. 

Bankruptcy Abuse Prevention and Consumer Protection Act 

In an attempt to stem a rising tide of personal bankruptcies, Congress instituted a restriction on Chapter 7 filings back in 2005. According to NPR, supporters of the Bankruptcy Abuse Prevention and Consumer Protection Act intended it to thwart gamblers, fathers avoiding child support, and multimillionaires seeking to shelter assets from creditors. 

As a result, Bankruptcy Code Section 707 states:

    (b)(1) After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor's consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief [a discharge of debts] would be an abuse of the provisions of this chapter. . ..

In "English", this means the ability of bankrupt individuals to obtain a discharge via Chapter 7 if they are discharging debts incurred for personal purposes was inhibited. The goal was to head off those who knew they were about to have money problems and went into debt with no intention to pay. However, the Act, in combination with the virus, now threatens to harm millions of Americans who have lost their incomes through no fault of their own. 

Bankruptcy Rules & the CARES Act

The good news is some of those restrictions have been eased as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. For openers, it's pretty obvious that few people went into debt with no intention of paying as a result of COVID-19 related layoffs and the like. 

The vast majority of this debt was incurred for living expenses such as food, clothing, utilities, or medical services. Treating them as frivolous is inherently unfair and not what the Bankruptcy Abuse Prevention and Consumer Protection Act was intended to restrain.

Still, The Implications of Bankruptcy Are Unfavorable

Even with these relaxed restrictions however, bankruptcy could be considered a last option rather than the first choice. There are a number of other ways to deal with debt including credit card consolidation, credit counseling, debt management and debt settlement. 

Any of these methods are typically preferable to filing for bankruptcy protection, which can stain your credit history for seven to 10 years. Yes, it's a good way to get creditors off your back, as the stipulations include an automatic stay in which debt collection efforts must be stopped. However, the detriments can outweigh the benefits in a lot of cases. 

Either way though, bankruptcy attorneys are not going to have a difficult time arguing debt incurred as result of the COVID-19 pandemic, while personal in nature, did not originate voluntarily. After all, the economy has been all but closed since March of 2020. Still though, it will be interesting to see how these issues are resolved as the inevitable flood of COVID-19 triggered personal bankruptcies wind their way through the judicial system.