How to File for Bankruptcy During COVID-19

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Advice from a Phoenix Bankruptcy Attorney

When the COVID-19 outbreak first struck the United States in early 2020, stay-at-home orders and other social distancing measures were initiated to reduce the spread of the novel coronavirus. An unfortunate consequence of these COVID-19 prevention measures was the closure of federal bankruptcy courts. This created a significant backlog in bankruptcy cases and caused delays both for debtors preparing to file for bankruptcy and those already in bankruptcy. The bankruptcy courts have since reopened and resumed handling bankruptcy cases, but with new protocols for filing bankruptcy, including some key modifications to federal bankruptcy laws.

If you are planning to file for Chapter 7, Chapter 11, or Chapter 13 bankruptcy during COVID-19, we recommend consulting a bankruptcy lawyer to find out how to go about completing the process as quickly and efficiently as possible.

Understanding the Bankruptcy Process During COVID-19

More than a year into the global pandemic caused by the novel coronavirus, bankruptcy cases have not skyrocketed as experts predicted. In fact, personal and business bankruptcies dropped by nearly 30% from 2019 to 2020, despite the widespread economic chaos stemming from COVID-19. That being said, statistics show that people typically wait an average of 22 months after receiving their first 90-day past-due notice before filing bankruptcy. And as the pandemic continues to run its course, more and more individuals, families, and businesses facing mounting financial challenges due to COVID-19 are expected to turn to bankruptcy to free themselves of overwhelming debt.

If you find yourself burdened by debt during COVID-19 and you are considering filing for bankruptcy, you will want to have a clear picture of what the bankruptcy process entails and how bankruptcy cases have been affected by the ongoing coronavirus pandemic. While bankruptcy courts across the country were forced to shut down at the beginning of the COVID-19 crisis, creating a backlog of bankruptcy cases and unavoidable delays for households and businesses seeking much-needed debt relief, the courts are back up and running and handling bankruptcy cases again. This is good news for those in need of assistance during COVID-19.

How Does Bankruptcy Work in Arizona?

For the most part, the bankruptcy process during COVID-19 remains unchanged. Whether you are seeking bankruptcy protection under Chapter 7, Chapter 11, Chapter 13, or another chapter of the U.S. Bankruptcy Code, the first step is to file a petition with the bankruptcy court. Once you have filed a bankruptcy petition, no matter where you have filed or under which chapter, you are protected by the automatic stay, which prevents creditors from making any attempts to collect the debts you owe. This is an important consideration for those dealing with overwhelming debt in addition to harassing collection calls or letters from creditors. 

There are several different types of bankruptcies under federal law, which are named for their chapter in the Bankruptcy Code. The most common are Chapter 7, Chapter 11, and Chapter 13. For the most part, individuals can file Chapter 7 bankruptcy to liquidate their assets and discharge their debts, or Chapter 13 to create a payment plan and repay all or a portion of the debts they owe, depending on their specific situation. The options for businesses are slightly different. Chapter 11 bankruptcy is an option for business owners who want to reorganize their debts and remain in business. Or they may choose to file Chapter 7 bankruptcy to liquidate their business assets and shut their business down. 

All bankruptcy cases, regardless of chapter, are handled in federal court and are subject to the rules outlined in the U.S. Bankruptcy Code. Some of these rules have been modified in response to the coronavirus pandemic, and these modifications could have an impact on your bankruptcy case. Although you do not need a lawyer to file for bankruptcy during COVID-19, we strongly recommend seeking the advice of a seasoned bankruptcy attorney to ensure that you get the best possible outcome in your bankruptcy case. If you have questions about how to file for bankruptcy during COVID-19, consult a qualified bankruptcy attorney as soon as possible.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed in response to COVID-19, included provisions that offered small business owners experiencing economic distress due to COVID-19 more opportunities to seek protection under Chapter 11 of the U.S. Bankruptcy Code. Among other things, the CARES Act increased the debt eligibility threshold for a bankruptcy filing under Subchapter V of Chapter 11 from $2,725,625 to $7,500,000, thereby opening up the Chapter 11 bankruptcy process to more small businesses struggling with heavy debt due to the pandemic.

Another law known as the Consolidated Appropriations Act of 2021 (CAA) was passed as a supplement to the CARES Act. This new law created additional provisions aimed at making the bankruptcy process more equitable and assisting those dealing with the economic fallout of the COVID-19 crisis. For instance, under the CAA, debtors already in Chapter 13 bankruptcy may be permitted to extend the length of their repayment plan to seven years, rather than the typical three to five years. 

The ongoing coronavirus pandemic has resulted in several other amendments to personal and small business bankruptcy laws. For instance, Section 1113 of the CARES Act temporarily provides that coronavirus stimulus payments and other federal relief payments will not be included in the calculation of monthly income for debtors filing bankruptcy under Chapter 7, nor will they count as disposable income for debtors filing under Chapter 13. That means receiving COVID-19 relief payments will not affect your eligibility to file a Chapter 7 or Chapter 13 bankruptcy.

What You Need to Know About Filing for Bankruptcy

For some households and businesses, bankruptcy may be the best option for discharging debt or making a practical plan to repay debt over time, especially debt that has accumulated during the COVID-19 crisis. If you have not yet filed for bankruptcy and you have significant personal or business debt you can’t afford to pay, your first step should be to contact a bankruptcy attorney to find out how to proceed. You may qualify for Chapter 7, Chapter 11, or Chapter 13 bankruptcy, and if that is the case, you will need to be apprised of the specific rules for the district and the courthouse in which you plan to file, as well as the temporary rules established by the new COVID-19 bankruptcy laws. Contact us today to speak to a knowledgeable bankruptcy attorney about your case.

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