Our economy is at a standstill. Many have been laid off or have had work hours reduced due to the coronavirus and social distancing mandates.
At the same time, states struggled to implement the expanded unemployment benefits offered by the recently passed federal Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). Similarly, while the CARES Act provides for relaxed criteria for loans and grants from the Small Business Administration (SBA), the SBA could not keep up with the pace of applications. Now, both of these provisions have run out and Congress has failed to enact new stimulus despite the fact that the unemployment rate remains at about 8%.
Help is supposedly coming, but in the meantime, we are still incurring expenses. Here’s a guide to some federal debt relief as well as some things to keep in mind should you be forced to consider bankruptcy due to loss of income during the Covid-19 pandemic.
Temporary Federal Debt Relief During the Pandemic
Student Loan Forbearance
Federal student loan borrowers did not have to make monthly payments until September 30, 2020, under the CARES Act. During this 6-month period, interest did not accrue, and the six months applied to loan forgiveness programs.
While the original provision has expired, on August 8th the President directed the Department of Education to continue to suspend loan payments, collections, and to continue to waive interest on student loans until December 31st of this year.
The CARES Act, as well as the extension ordered by the President, did not address Perkins loans, FFEL loans, or private student loans, so if you have any of these, you must contact your servicer or lender to find out if there is any forbearance program available to those who are suffering financial hardship due to the coronavirus outbreak.
SBA Loans and Grants for Small Businesses and the Self-Employed
Emergency Economic Injury Disaster Loans and Grants (EEIDL)
For sole proprietors, the self-employed, independent contractors, and small businesses with 500 employees or fewer, the CARES Act created the EEIDL available direct from the SBA website. Applicants could receive a grant of up to $10,000 even if the SBA ultimately denied their EEIDL application.
PPP Small Business Loans
The Paycheck Protection Program (PPP) relaxes the normally strict criteria for eligibility for SBA loans. If at least 75% of a PPP loan is used for payroll and payroll costs, with the rest paying expenses such as mortgage interest, rent, and utilities, it can be wholly forgiven.
The SBA Will Pay 6 Months of Other 7(a) Loan Payments
If you applied for and were given an SBA loan between March 27, 2020, and September 26, 2020, up to $1 Million, the SBA will pay six months’ payments for you.
Homeowners and Renters Relief
Ongoing foreclosure suits are now suspended, foreclosure judgments cannot be entered, sheriff sales cannot be held, and new foreclosure suits cannot be filed for 60 days after March 18, 2020. While the moratorium began with the CARES Act, the FHA has extended the foreclosure and eviction moratorium for homeowners through the end of this year.
Relief for Homeowners
The CARES Act requires federal lenders Freddie Mac and Fannie Mae to offer mortgage forbearance for up to a year to borrowers experiencing financial hardship due to the pandemic. Borrowers must apply for forbearance as it will not be extended automatically.
FHA-Mandated Relief for Landlord and Tenants
In exchange for refraining from evicting non-paying tenants during the COVID-19 crisis, the Federal Housing Finance Agency (FHFA) now offers mortgage forbearance to landlords.
Considering Bankruptcy During the Pandemic
Hopefully, the relief programs that began with the CARES Act have helped most keep afloat over the last 6 months. However, for those still out of work and having trouble paying their bills, you may need to consider other options. One of those options you may be considering is filing for bankruptcy.
What is Bankruptcy?
Before we move into the things you should consider when filing for bankruptcy during the pandemic, we first need to discuss what bankruptcy is.
Put simply, bankruptcy is a legal process where people or businesses who can’t repay their debts seek relief from some or all of their debts. Bankruptcy is handled in federal courts, and there are various types of bankruptcy depending on the situation. These types are commonly referred to by their chapter within the bankruptcy code.
The most common types of bankruptcy filed by individuals are Chapter 7 and Chapter 13. Chapter 7 is typically for those with few assets and allows the debtor to dispose of their unsecured debts. However, those with nonexempt assets must liquidate those assets in order to pay some or all of their debt.
Those who don’t qualify for Chapter 7 must file under Chapter 13. Chapter 13 allows individuals to create a reasonable debt repayment plan, and in exchange, the debtor is allowed to keep all of their assets.
Advantages and Disadvantages of Bankruptcy
The advantage to filing for bankruptcy is that it will help relieve you of your legal obligation to repay some or all of your debts. Depending on the type you file, you may also be able to keep your assets, such as a home.
However, the main disadvantage of bankruptcy is that it will lower your credit score and remain on your credit report for 7-10 years depending on the Chapter filed. Having a lower credit score, as well as a bankruptcy on your credit report, will make it more difficult to secure new credit down the line.
Three Things to Consider Before Filing Bankruptcy During the Pandemic
Filing bankruptcy might be the answer for those who have lost income due to the coronavirus health emergency, however, those considering bankruptcy should consider the consequences and benefits of filing now versus filing later.
The timing of your filing is important because bankruptcy only discharges (wipes out) pre-petition debt. This means that any debt you incur after the date of filing your bankruptcy case is not discharged, and you are responsible for paying it.
Here are three factors to consider before deciding to file for bankruptcy during the pandemic.
Are You Incurring More Credit Card Debt Due to the COVID-19 Crisis?
If the answer is yes and you have the ability to continue to pay your monthly minimum payment, or, your credit card lender has offered some relief such as skipped payments or an interest reduction, you might consider waiting to file bankruptcy. You don’t know how long this health emergency will last, and therefore you don’t know what further expenses you might incur.
If the answer is no and you can manage your minimum monthly payment, again, you might consider waiting to decide whether to file bankruptcy or not.
If you cannot afford to pay your minimum monthly payment, do not ignore that bill. Contact your lender and see if they will work with you to make it more affordable. If your lender will not work with you, at that point, it might be prudent to consider filing a bankruptcy petition sooner rather than later.
Are you Incurring Medical Debt Due to the Coronavirus?
If you’ve contracted the coronavirus, you may incur uninsured or unreimbursed medical expenses now and in the future. Again, if you file now, you will only be discharged of pre-petition medical expenses, not future medical expenses. If you can wait until you’ve recovered and received all of your medical bills before you file a bankruptcy petition, you will capture all of those expenses in your filing and have them all discharged.
Do You Know if You Can Afford Your Mortgage Six Months from Now?
If you can afford it now, then you know. If you are relying on temporary forbearance and are out of work, there is no way to know if forbearance will be extended past the current terms offered, and there is likely no way to know whether you will have returned to work or not. In this case, it may be prudent to adopt a wait-and-see attitude for now and just concentrate on staying safe and staying strong.
As you have read, bankruptcy could be an option for many of you if your income loss means you are incurring debt you can’t pay, or, if your income is insufficient to pay the debt you already have. However, it should not be the first option and should only be considered if you’ve run out of other options.
Luckily, the CARES Act and the extension of several of its provisions, as well as the possibility of a second stimulus package, have and may continue to provide relief for those struggling to pay their bills. Take advantage of the current relief options out there, and make sure to contact and try and work with any lenders or service providers whose bills you may be struggling to pay. Most are willing to work something out. You should also consider options like debt consolidation.
If you’ve exhausted your options and you feel like bankruptcy during the pandemic is the only way, try to wait to file bankruptcy until your income and debt situation stabilize. That way, you will have a greater opportunity to capture all of the COVID-19 debt in your filing and have it all discharged.
The best course of action is to be proactive. Whatever you do, don’t ignore the situation until you have no other options.