Debt Caused By the Coronavirus
We are living through a time with historical implications.
The latest Coronavirus, named “Covid-19” has halted businesses, entertainment, social events, and caused the stock market to tumble.
The medical impact of this virus is being debated, but the economic impact is yet unknown and will be devastating for years to come.
The inability of certain businesses to operate at full capacity will cause irreparable harm and many will go out of business leaving their employees without jobs.
Typically Americans live paycheck to paycheck, without a large savings. So if layoffs or reduced hours occur, how are Americans going to pay their bills?
I will discuss ways to avoid bankruptcy, but also explain how bankruptcy is available as an option.
How To Avoid Bankruptcy From Covid-19
You have to eat, pay your rent, gas for your cars, utilities, medicine, insurance and many other essential expenses.
So where does the money come from if you cannot work?
Most will need to rely upon social safety network programs, but some may borrow money somehow to get through.
There are many ways to borrow money, and they are not equal in terms of problems they can cause.
The primary borrowing options are:
- Getting a loan from a bank (secured or unsecured);
- Getting a loan from friends or family;
- Borrowing from 401k/retirement accounts/children’s college savings plan;
- Using credit cards to pay for living expenses (or taking cash advances); and
- Getting a payday loan.
Which should you use to minimize you need to file bankruptcy? These are reviewed below:
-Bank Loans To Pay Your Expenses
Loans can be either secured by collateral (such as your house) or unsecured.
Secured loans give you the best terms as far as interest rates and time period for repayment. For example, if you are lucky enough to own a house with equity, you could possibly refinance your existing loan or take out a “HELOC” (home equity line of credit) to help. We have been busy at the office assisting clients to do these types of loans for the last month and a half. If you have not arranged such a loan, you are not too late. You still may be able to obtain these types of loans.
Secured loans of course must be repaid according to whatever payment plan you agree, or else the lender can foreclose on the property.
So if you want to keep your property, increasing the secured debt against your house may not be your best option, unless you are sure you are able to make all the future payments on the loan(s).
Loans from banks may also be unsecured. But the unsecured loans will have a higher interest rate and usually a shorter time period to repay the loan.
If you don’t pay on time, you can be sued and the debt can then be converted to a secured debt (lien) against any property you may have, or your wages garnished, or bank accounts levied.
–Borrowing From Friends Or Family
While I am not encouraging this, borrowing from family and friends is likely the best way to handle short term financial downswings and avoid a bankruptcy if you have the ability to do so.
Friends and family tend to not be as demanding about repayment of the debts and are generally more flexible about repayment terms.
There are, of course, limits to how much you can impose, but as a short term solution, this might be the best option.
–Borrowing From Your Retirement
While this may seem like a good idea, it is generally not the best option for a number of reasons.
If you don’t “repay” the loans, you may end up with penalties and a tax liability, which is harder to eliminate in bankruptcy and otherwise.
–Should You Use Credit Cards When Your Income Drops?
Credit cards are unsecured loans at a high interest rate. Not quite as high as payday loans, but high.
While it may become necessary, using credit cards to pay for goods and services is not the best option for dealing with a downturn in income, unless you have the ability to pay off the full balance each month or your income will return to a level where you can afford to make meaningful payments on the balance.
The most common way credit card debt results in a bankruptcy filing is from situations exactly as we face today with the Covid-19 crises; when you need it to survive. It is uncommon that bankruptcies are caused because the user of the credit cards are going on wild and exotic trips and buying unnecessary things.
–Payday Loans
This option is only available of course if you have a job and is the one most people run to in a crunch.
It is likely the single worst option available.
While the loan amounts tend to be quite small in comparison to the other loans, the interest rates and repayment terms are unconscionable. It is no joke that the interest rates can be greater than one hundred percent (100%) and not a favorable interest rate.
How Can Bankruptcy Help with Debts Incurred Due to Loss of Income?
Not everyone has relatives or friends from whom they can borrow money, or a large savings account sitting ready for there “rainy days”.
You have to feed your children, buy clothes, put gas in the car, pay for medicine, electricity, water, etc.
Sometimes ya gotta do what ya gotta do.
Fortunately, the bankruptcy laws are here for exactly this time of scenario.
And the consequences of filing bankruptcy , such as impact on credit scores, are usually far less than most think.
There are different bankruptcy chapters and each has its own pros and cons.
Chapter 7 allows you to get rid of dischargeable debts without making any payments, but you can only protect a certain amount of assets, and there are income eligibility requirements.
Chapter 13 allows you to do a repayment plan based on your budget and asset values. It has great flexibility and works for many who cannot do a Chapter 7 case.
Deciding which is best for your situation can only be done by having a comprehensive consultation with a qualified bankruptcy attorney in your area.
But there are a few things to keep in mind before maxing out your credit cards or taking out other loans:
Bankruptcy will only discharge (i.e. relieve you from the obligation to pay) debts that are incurred with the intent to repay them.
Thus, you should not take out loans that you do not have a reasonable expectation of being able to pay them.
A reasonable expectation could be that you expect to return to work and you will be earning sufficient income to make the necessary payments on the loans you are taking out.
Nevertheless, there are different bankruptcy options available depending on your circumstances and usually one that will fit your situation.
Bankruptcy Is Here If You Need It So Don’t Stress
The takeaway from this article, I hope, is that you should do what you can to avoid putting yourself in a situation where bankruptcy becomes necessary. But if you cannot, do not stress about it because bankruptcy laws are there to protect you and alleviate your debt problems. An informative consultation with a bankruptcy attorney can be a very stress-relieving first step.
About the Author: Mitchell L. Taylor
Board Certified Specialist in Consumer Bankruptcy
Cray Law Firm PLC
Telephone: 319-752-4537
Email: [email protected]
www.craylawfirm.com
Special thank you to Mark J. Marcus, Attorney at Law and Board Certified Specialist in Bankruptcy Law. BKLaw.com