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COVID-19 and Bankruptcy
The rapid spread of COVID-19 across the country and around the world, paired with the isolation measures put in place to limit the escalation of the pandemic, has caused many Americans to question their physical, emotional and financial well-being. In addition to growing health concerns relating to the outbreak, the nationwide shutdown stemming from the pandemic has also resulted in unexpected financial hardships. Millions of Americans have lost their jobs as a result of the coronavirus quarantine, and in addition to worrying about their own health and the health of their loved ones in the midst of the COVID-19 crisis, many are now wondering how they will cope financially. The economic crisis brought on by the COVID-19 pandemic has the potential to cause long-lasting consequences for workers, families and business owners across the country, possibly resulting in bankruptcy.
Table of Contents
- Job Loss Due to COVID-19
- Businesses Filing for Bankruptcy
- Chapter 7 vs Chapter 11 or Chapter 13 Bankruptcy
- Senate Stimulus Package – CARES Act
- Financial Insecurity and Domestic Violence
- Domestic Violence, Divorce Rates on the Rise
- 7 Things You Should Know About COVID-19 and Bankruptcy
- If you are considering bankruptcy
- If you are in the process of filing for bankruptcy
- If you have already filed for bankruptcy
- Is COVID-19 Threatening Your Financial Security?
Job Loss Due to COVID-19
The sudden closing of schools, businesses, hotels, restaurants and retailers, while temporary, has had a debilitating impact on the U.S. economy. Millions of U.S. workers live paycheck to paycheck and even just a few weeks of reduced job pay threatens to cripple the financial stability of these workers and their families, leaving many unable to put food on the table. The new circumstances brought on by the ongoing coronavirus quarantine has forced businesses across the country to lay off and furlough workers during COVID-19, and an estimated 30 million Americans have filed initial unemployment claims since mid-March, or roughly 20% of the total U.S. labor force. According to economists from the St. Louis Federal Reserve, the unemployment rate could conceivably hit 32%, or 47 million Americans, before the COVID-19 crisis is over.
The quarantine will end eventually, but until it does, joblessness remains a serious problem in the United States. Personal incomes will continue to suffer as businesses stay closed and unemployment rates rise. And because nearly half of U.S. workers rely on their employer for health insurance, those who have lost their jobs as a result of COVID-19 may no longer have access to affordable health care.
Businesses Filing for Bankruptcy
Businesses across the country have closed their doors in an effort to stem the tide of COVID-19 and those that remain open report a huge drop-off in sales. The lockdown, combined with the fact that many Americans are out of work and only spending money on necessities, like rent and groceries, has resulted in a significant loss of business for many U.S. stores selling non-essential goods, like clothing. According to data from the U.S. Census Bureau, retail sales in general were down 6.2% in March, but certain types of businesses have experienced an even more dramatic plunge in sales. Sales for department stores, for instance, were down 24% and for clothing and accessory retailers, 51%. Some businesses faced with this crisis have employed cost-cutting measures in an effort to stay afloat, either furloughing staff, pulling from revolving lines of credit or putting off commercial rent payments. Others have opted for bankruptcy.
COVID-19 is affecting businesses in a very real and potentially devastating way, and not just retail businesses. According to new data, manufacturing production saw its biggest decline since 1946 in March and new home construction dropped by the highest amount in nearly four decades. Air travel has been one of the hardest-hit industries during COVID-19, with passenger travel demand at an all-time low, and many airlines have already collapsed due to the pandemic. According to CAPA, an Australia-based aviation consulting and research company, “most airlines in the world will be bankrupt” by the end of May, without immediate intervention.
We are in a recession, there is no doubt about that. And as businesses continue to struggle under the weight of the COVID-19 pandemic, bankruptcy seems to be a foregone conclusion for many. Modell’s Sporting Goods, a chain based in the northeast that has been around since 1889, filed for Chapter 11 bankruptcy on March 11, and announced plans to close all 153 of its stores. Dean & DeLuca, a luxury grocery store chain with 42 locations, filed for bankruptcy on April 1. In mid-April, clothing company True Religion filed for bankruptcy, citing financial hardship due to the ongoing pandemic. Both JCPenney, J Crew and Neiman Marcus are also reportedly considering bankruptcy. As of May 3, more than 40 major companies with at least 500 employees have filed for bankruptcy in 2020 and more are expected to join their ranks in the coming months as the pandemic drags on.
Chapter 7 vs Chapter 11 or Chapter 13 Bankruptcy
According to an online poll of more than 3,000 U.S. adults, collected during the week of March 30, 58% of Americans said they had already lost income due to COVID-19. Of those, nearly seven out of 10 expressed concerns about being able to pay their bills and make loan payments. Growing fears about financial instability are compounded by the fact that there is no clear answer as to how long the pandemic will go on. Dealing with the uncertainty brought about by the COVID-19 outbreak can be especially challenging for those who plan to file for bankruptcy. Thankfully, many courts have made temporary changes to bankruptcy procedures in order to facilitate the process of filing bankruptcy for those in quarantine. The following are the three main types of bankruptcy:
Chapter 7 Bankruptcy
Individuals or businesses who file for bankruptcy protection under Chapter 7 of the U.S. Bankruptcy Code typically liquidate their assets to pay back their creditors. The benefit of filing Chapter 7 bankruptcy is that it wipes out outstanding debts, so long as they are the types of debt that can be discharged in bankruptcy. Chapter 7 bankruptcy is best suited for those who are unable to pay back all, or a significant portion, of the debts they owe.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is a form of bankruptcy filing that involves a reorganization of the filer’s debts, assets and business affairs, usually involving a corporation or partnership. Companies that file Chapter 11 bankruptcy typically do so if they need time to restructure their debts. Under Chapter 11 bankruptcy, debtors can keep their business afloat and pay back their creditors over time.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a type of bankruptcy that gives filers the opportunity to restructure their debt into a repayment plan and repay what they owe over time, usually during a period of three to five years, rather than having the debt forgiven. Chapter 13 bankruptcy is also known as a “wage earner’s plan” and there are certain income requirements to qualify.
Senate Stimulus Package – CARES Act
In March, the Senate approved a $2.2 trillion stimulus package to address the economic fallout of the coronavirus crisis and support individuals and businesses affected by COVID-19. The legislation contained a number of measures intended to provide aid directly to workers, including more generous unemployment insurance benefits and stimulus checks for millions of Americans, as well as provisions aimed at helping business owners keep their businesses afloat during the quarantine, such as tax breaks and zero-interest loans. The Coronavirus Aid, Relief and Economic Security (CARES) Act also makes certain changes to the U.S. Bankruptcy Code in order to provide more effective bankruptcy relief to individuals and small businesses during COVID-19.
Financial Insecurity and Domestic Violence
Concerns about the spread of COVID-19 and the subsequent nationwide lockdown have disrupted the lives of millions of Americans. State unemployment offices have been flooded with claims and government aid has been slow to reach many Americans, which has only intensified the economic downturn and increased coronavirus-related fears and anxieties. Millions of people are stuck in their homes, forced to adapt to new work arrangements and faced with strict limitations on their movement, with no outlet for their frustration. It is not uncommon in times of crisis like this for tensions to reach a boiling point in marriages and other intimate or family relationships where problems already exist, possibly leading to abuse.
Domestic violence, or intimate partner violence, is a pervasive problem in the U.S., one that can affect anyone, regardless of their gender, age, race or sexual orientation. Unfortunately, intimate partners in abusive relationships are facing an increased risk of domestic violence during COVID-19. With widespread stay-at-home and shelter-in-place orders implemented across the country to stop the spread of the novel coronavirus, domestic violence victims are suddenly finding themselves stranded in their homes with their abusers. Add to that mounting anxieties about job loss and financial security, and the coronavirus pandemic may be making violence in troubled homes more frequent and more severe.
Domestic Violence, Divorce Rates on the Rise
Just because you and your partner are experiencing financial problems during COVID-19 doesn’t mean your relationship will become abusive, but research shows that financial insecurity does increase the risk of domestic violence. The U.S. Centers for Disease Control and Prevention (CDC) includes unemployment, low income and economic stress in its catalog of risk factors for intimate partner violence perpetration. Add to that the extra stress and tension stemming from the coronavirus quarantine, and it comes as no surprise that divorce rates and domestic violence rates are both on the rise during COVID-19.
7 Things You Should Know About COVID-19 and Bankruptcy
The United States faces an unprecedented challenge in the COVID-19 pandemic and the economic crisis that has resulted from the coronavirus shutdown has left many people at risk for bankruptcy. In response to the economic downturn arising from the coronavirus crisis, many individuals and businesses are turning to bankruptcy for relief and others are wondering how the coronavirus quarantine and shutdown will affect their pending bankruptcy case. The following are seven things you should know about the COVID-19 crisis and bankruptcy cases in the United States:
If you are considering bankruptcy
- You can still file for bankruptcy during COVID-19, although new cases may not proceed as quickly during the quarantine as they would under normal circumstances.
- The automatic stay still goes into effect when you file. That means you can put a stop to calls from bill collectors and creditors during the pandemic.
If you are in the process of filing for bankruptcy
- Due to COVID-19 and the resulting disruption of the courts, meetings have been delayed, which means you may experience delays in your bankruptcy case.
- Despite delays in bankruptcy proceedings, you should still be aware of all deadlines associated with your bankruptcy case, including when paperwork and filing fees are due.
If you have already filed for bankruptcy
- If you receive relief payments from the federal government, you may not have to turn them over to bankruptcy trustees.
- When you file for bankruptcy protection under Chapter 7 or Chapter 13, federal relief payments will not have an impact on the determination of your income or on the calculation of your Chapter 13 payments.
- If you are obligated to make Chapter 13 payments, you should continue to do so during the pandemic, if possible.
Is COVID-19 Threatening Your Financial Security?
Right now, the country’s economic outlook is grim. Shutdowns intended to slow the spread of COVID-19 have had crippling financial consequences for individuals, couples, families and businesses across the country. We are seeing historic unemployment numbers and a desperate need for economic assistance in dealing with the widespread financial hardship triggered by the coronavirus health crisis. The latest data puts the unemployment rate in the U.S. at 20.6%, the highest level since 1934, and the unemployment claims continue to roll in. Says Joseph Brusuelas, chief economist at audit firm RSM, “At this point in the pandemic, roughly one in every seven individuals in the workforce is unemployed.” The longer the COVID-19 pandemic goes on, the more severe the economic crisis will become, the more strain financially strapped individuals and businesses will feel, and the more likely they will be to turn to bankruptcy. Filing for bankruptcy can be a difficult decision to make, but the current circumstances have forced many people to consider it as an option.