What Is Bankruptcy And Is It Different During The Pandemic?

Published 04/21/2021

It's an unfortunate fact that throughout our lives, some of us may face complex and uncertain financial times. During the initial months of the COVID-19 pandemic, experts expected to see a surge in bankruptcy filings. Surprisingly, that never came to pass, and throughout the pandemic, filings have actually dropped by nearly 30%.

First, there are protections offered by the various Coronavirus Relief Packages passed by Congress – such as mortgage and rent protections and forbearance on Federal student loans. However, there are also court system shutdowns, and due to a lack of income, people were simply unable to file for bankruptcy despite their need. If that's the case, then experts may still have cause for concern that in the coming months, when the second relief package expires, many people may be forced to file.

But what exactly is bankruptcy – and is it something to be ashamed of?

The United States Bankruptcy system is a system to provide individuals and corporations with debt relief during trying times. There are various types of bankruptcy – the most common being Chapter 7 and Chapter 13 for individuals and Chapter 11 for corporations. Each type of bankruptcy facilitates a different kind of relief.

Chapter 7 Bankruptcy
Chapter 7 Bankruptcy is the most common and is essentially a liquidation of the filer's assets to pay back their creditors. This means property – such as homes and cars – may be seized and auctioned, with the proceeds going to the creditors. There are some forms of exempt property, such as personal items like clothing and tools needed for work. It's also possible that depending on how your financial and property arrangements are structured, homes and vehicles may be protected and exempt as well.

Chapter 13 Bankruptcy
With Chapter 13 Bankruptcy, individuals have their debt reorganized and typically have about 3 to 5 years to pay it down. This type of bankruptcy enables individuals to keep their property, which makes it a favorable option. The amount of debt, the amount of income available, and the assets' value determine what the monthly payments will be. The payment amount might be so significant that it doesn't provide the relief initially hoped.

Bankruptcy can discharge only certain types of debt. The types of debts that can be discharged are unsecured debts such as:

  • Credit cards
  • Most medical bills
  • Some types of personal loans

Types of debt that cannot be discharged through bankruptcy include:

  • Student loans
  • Child support/alimony
  • Some tax debt
  • Homeowners' Association Fees
  • Court fees/penalties
  • Some types of personal injury debt

It's also possible that a creditor – such as a credit card company – may object to certain types of debt being discharged. An example of this would be if you recently used a credit card to pay for a luxury item or vacation. Your credit card company may file an objection to the debt being discharged, and you could still be required to pay it.

If you're unemployed, you can file for bankruptcy. While many people are ashamed at the prospect of filing for bankruptcy, Raymond Kluender, an assistant professor in the Entrepreneurial Management Unit at Harvard Business School, says that shouldn't be the case. In fact, he argues, that individuals should look at bankruptcy in the same way that corporations do – as a tool that is readily available and at their disposal to get through difficult times. In a recent article for Harvard Business School, he even argued that it should be easier for individuals to take advantage of filing for bankruptcy. "If you change the way that Chapter 7 operates, so you don't have to pay for your bankruptcy attorney at the time where you are in the most desperate need to file for bankruptcy, [the filer] could instead pay filing and attorney fees over time," Kluender says. "That could be very beneficial and allow people who currently can't afford to take advantage of the benefits that they're entitled to through consumer bankruptcy."

If you're considering filing for bankruptcy, there are some things to keep in mind regarding stimulus payments and social security and retirement benefits:

  • The CARES Act didn't include a provision to protect stimulus payments from debt collectors or creditors in bankruptcy. Once placed in a bank account, they become unprotected funds that are subject to seizure.
  • Social Security benefits are protected from most creditors, but only when deposited in a dedicated account, not mixed in with other types of income or funds.
  • Finally, many debtors don't realize that retirement accounts are protected in bankruptcy and make the mistake of avoiding bankruptcy by exhausting retirement funds. Speak with your lawyer or financial advisor before tapping into your retirement accounts to pay down debt.

There are opportunities to file for bankruptcy online. There are also many reasons to consult a professional who can help you determine the best course of action for your particular situation.