Should I File for Bankruptcy After Losing My Income Due to COVID-19?

2020 and 2021 have been tough years for Texas residents. As COVID-19 has rolled through the state in waves, thousands of restaurant workers, entertainers, and others have lost their income entirely for months on end. Some are now wondering if they should file for bankruptcy as a way to cut their losses and start over. But bankruptcy isn’t the cure for every financial ailment caused by the Coronavirus.

Texas Residents Face Lost Income Due to COVID-19

March and April 2020 set records for Texas’s unemployment -- reaching numbers not seen since the Great Depression nearly a century earlier. At the worst of the pandemic, more than 1.4 million Texans lost their jobs. The hospitality industry alone fired 500,000 workers. While the economy has begun to recover, many employers report that revenues are still below normal. They say getting back to pre-COVID-19 numbers may take another six months to a year.

Women and families with children have been especially hard-hit. Because of remote schooling and closed child-care centers, many parents -- most often women -- have had to leave their jobs while their children stayed at home. When two incomes dropped to one, or worse, when state-wide shutdowns cut off all income sources, some Texans naturally fell behind on their financial obligations. Now, they may be considering whether to file for bankruptcy as a way to reset the clock.

What Happens When You File for Bankruptcy

Bankruptcy can provide meaningful relief to Texas residents facing collections on their personal debts, or foreclosure on their homes. Depending on a family’s situation, when a family files for bankruptcy, it can:

• Put an immediate halt to collections calls and foreclosure proceedings (up to the point of a sheriff’s sale)
• Discharge many unsecured debts under Chapter 7
• Restructure the family’s debt payments to reasonable levels under Chapter 13

Filing for bankruptcy gives Texas families certainty. While a Chapter 7 bankruptcy requires petitioners to liquidate all non-exempt property, the rest -- including the family’s home and vehicles -- are theirs to keep. Bankruptcy can help to erase the lasting impact of past mistakes, and the kind of unexpected and extended loss of income that COVID-19 has brought to so many.

COVID-19 Bankruptcies Hit a Different Type of People, Expert Says

However, the people considering bankruptcy because of COVID-19 are often not the types who would need to file in normal circumstances. COVID-19 hit everyone, including frugal spenders and those with steady incomes. Ike Shulman, co-founder of the National Association of Consumer Bankruptcy Attorneys (NACBA) told Forbes:

“What we’re seeing with Covid-19 is that there are so many people that never dreamed they’d be talking to a bankruptcy lawyer or having to file bankruptcy. That wasn’t in their wildest dreams. . . .

“The rug got pulled out from under them by something they had no control over. . . . It wasn’t bad financial planning or anything they could be prepared for.”

Business owners, too, are facing tough decisions about whether to weather the ongoing storm of economic recovery, or to turn to bankruptcy.

Should You File for Bankruptcy if You Lost Your Job During the Pandemic?

Still, not everyone who lost income due to COVID-19 should file for bankruptcy, or at least, not yet. For some, the federal and state stimulus programs available through the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act and other COVID-19 relief programs may provide enough relief to avoid bankruptcy. There are extended unemployment insurance benefits available, extended foreclosure forbearance, and loan programs designed to replace the salaries of workers displaced by the COVID-19 shutdowns.

Even if you have exhausted the relief available to you, bankruptcy may not improve your situation. Remember that bankruptcy itself won’t replace income lost due to COVID-19. If you are making $0 when you file for bankruptcy, you will still make $0 after your debts are discharged (unless you find replacement employment in the meantime). In addition, the liquidation process could force you to use up your family’s rainy-day fund even faster than you are right now.

The waiting period on a Chapter 7 bankruptcy is also something to consider. Texans have been hit hard by the fourth wave of COVID-19 in July and August 2021. If you file for bankruptcy now and then lose your job or get sick yourself, you could end up with even more debt that you cannot discharge for eight years. In some cases, the best option is to be patient, take on loans and credit card debt if you have to, and wait to see what happens as the pandemic continues.

The Future for COVID-Related Bankruptcy in Texas

There will certainly be an increase in COVID-related bankruptcy in Texas. Families with unpaid medical bills or those who lost their income for months on end will need help building their own personal financial recovery. However, some experts believe that this will be the “long tail” of COVID-related relief, extending for months and even years after the U.S. economic recovery.

Those who do file for bankruptcy as a result of the pandemic will benefit from the COVID-19 Bankruptcy Relief Extension Act signed by President Joseph Biden on March 27, 2021. This law excludes federal stimulus money and other Coronavirus-related payments from the definition of income for Chapter 7 means tests and Chapter 13 payment plans. It will also allow people who had already filed for a Chapter 13 bankruptcy to extend their payments for up to seven years if facing financial hardship due to COVID-19. This will help ensure that those who do turn to bankruptcy as a COVID-19 debt relief strategy will not be penalized for having relied on government programs when things were at their worst.

I’m Attorney Patrick T. Williams, and I have been guiding Houston-area debtors through bankruptcy for over 20 years. I know how to use bankruptcy to ease the financial impact of a medical emergency. And I understand how COVID-19 is impacting the financial futures of Texas families. If you are considering a COVID-related bankruptcy, please call me or fill out an online consultation form to get help deciding if bankruptcy is the right relief for you.