California’s “Stay-at-Home” order and the resulting lockdown to confront the Coronavirus (also known as “COVID-19”) pandemic forced most businesses—except those deemed to be essential—to shut down as of March 19, 2020 until Governor Gavin Newsom issues an order to end the Stay-at-Home order. With the end of the lockdown uncertain, business as usual is no longer possible and personal financial concerns become more aggravated with each day the lockdown continues. Common Coronavirus-induced financial issues include being furloughed from work, being laid-off from work, and being unable to operate a non-essential business. The result is that the regular income that an individual earned and relied on in the past has become uncertain, while the bills for expenses necessary to live as before continue to grow. This result can induce stress and cause great financial concern as the individual’s means to keep up with expenses continues to diminish.
To alleviate these common financial concerns, the State of California has prevented the eviction of any residential tenants until after July 28, 2020, lenders have agreed to permit the non-payment of mortgage payments for several months, and the Federal Government is in the process of issuing funds to Americans to assist with payment of bills. Although this is all well and good temporarily, the fact of the matter is that it is uncertain what the future holds for millions of Californians who are waiting for Governor Newsom to remove the Stay-at-Home order so that business as usual can return.
Meanwhile, each individual needs to take stock of his or her current financial condition to see whether he or she is going to be able to have sufficient funds to meet his or her living expenses and pay debts now and in the future. If you find yourself in a situation where your current income is insufficient to pay your living expenses and your debts as they come due, you need to consider taking action.
The first action should be to prepare a budget (i.e. list your monthly sources of income, expenses, and incurred debts). Next, you need to figure out what debts you owe, to whom, and when they will come due. After listing your expenses, consider which are non-essential and make a plan to eliminate them. Once you’ve created your budget and eliminated non-essential expenses, if you determine that you are still unable to pay your debts as they come due, the next step is to contact your creditors to see if they will voluntarily forbear from taking collection action against you and/or whether they will agree to a payment plan that will work with your circumstances. If you have a significant creditor that refuses to voluntarily forbear from taking collection action and you cannot pay the creditor, then you are candidate to file a bankruptcy, which will force creditors to refrain from collecting their debts against you.
Bankruptcy is a mechanism that allows you to arrange to pay your debts to creditors in an organized and orderly manner with the assistance and instruction of a federal bankruptcy court. Bankruptcy is usually pursued by individuals who have experienced: (1) an unexpected drop in income (usually from the loss of a job); (2) an unexpected large expense (usually from a major medical problem); (3) an unexpected increase in a large liability (usually from a divorce for assumed debts or from a judgment in a lawsuit); or (4) to end creditor collection actions, such as a foreclosure, repossession, eviction, or a lawsuit. Only a small minority of individuals file bankruptcy as a result of over-spending.
There are different chapters of bankruptcy relief to meet the different situations encountered by debtors. A petition for Chapter 7 for bankruptcy relief is filed when the debtor has made less than the median income for families (defined as one person plus all of his or her dependents) over the preceding six months. This is determined in a complicated “Means Test.” If you made more than the state’s median income,[i] then you are prohibited from filing a Chapter 7 bankruptcy petition. If you currently make more than the median income in the Means Test but did not previously, then you have to wait until your Means Test calculation drops you below the median income before you can file a Chapter 7 bankruptcy petition. One of the predicaments caused by the Stay-at-Home order is that many individuals who need bankruptcy relief do not currently have regular income but have made too much income previously to file a Chapter 7 bankruptcy petition, and so they must wait more months to qualify for Chapter 7 bankruptcy.
Some advantages of filing a Chapter 7 bankruptcy petition for an individual are (1) your debts are discharged (except most student loans, taxes not eligible for discharge, and divorce obligations) usually within a few months of filing the petition; (2) all collection action by creditors ceases; (3) you keep your income the moment after you file your Chapter 7 petition; (4) you keep your property that is exempt under California law (i.e. a homestead in real property or a “wild card” of about $23,000 in any property); (5) you free up your cash inflow to allow you to pay your remaining expenses and debts; and (6) you can opt to reaffirm a discharged debt in order to keep the property that is collateral for that debt, such as your home, car, boat, etc.
Some disadvantages of filing a Chapter 7 bankruptcy petition for an individual are (1) you surrender all property that’s value exceeds your exemptions to pay your creditors—nonexempt property is sold by the Chapter 7 Trustee to pay his or her fees and then used to pay your creditors; (2) you cannot modify a loan during your bankruptcy case unless the creditor agrees to it; (3) the Chapter 7 Trustee will shut down any business(es) that you operate; (4) you will pay higher interest for credit; and (5) the bankruptcy filing will be on your credit report for many years.
Another option is to file a Chapter 13 bankruptcy petition, which is the primary bankruptcy case for individuals unless they meet the Means Test for a Chapter 7. A Chapter 13 bankruptcy is limited to individuals who (1) have a regular source of income; (2) have less than $419,275 in debts that are not secured by any collateral; and (3) and have less than $1,257,850 in debts that are secured by collateral. If an individual owes more than these amounts, the individual is prohibited from filing a Chapter 13 and may only file for Chapter 11 bankruptcy.[ii]
A Chapter 13 bankruptcy creates new contracts between you and your creditors called a “Chapter 13 Plan.” This Plan must meet certain statutory requirements to be deemed fair and non-discriminatory to your creditors before a bankruptcy judge will approve your Plan. A Chapter 13 Plan requires you to make regular monthly payments to your creditors from 3 to 5 years after approval by the bankruptcy judge.
Some advantages of filing a Chapter 13 bankruptcy petition are (1) all collection action by creditors ceases ; (2) you have the right to dismiss the Plan if you no longer need bankruptcy protection to pay your creditors; (3) you keep possession of all of your property; (4) you can cure defaults on your debts over 5 years; (5) you pay the prime rate plus 1% to 3% on your debts, not the contract rate; (6) you can modify loans to pay lower interest rates and extend maturity dates; and (7) you can operate a business.
Some disadvantages of filing a Chapter 13 bankruptcy petition are (1) you must pay all of your disposable income to your creditors for 3 to 5 years; (2) you will not receive a discharge of your debts until after you have paid all of your creditors under your Plan; (3) you will pay higher interest for credit; and (4) the bankruptcy filing will be on your credit report for many years.
Bankruptcy has a negative social stigma because it is viewed as an unfair way for people to avoid paying their debts. While that is true for some, American history is replete with individuals who have achieved success after filing a personal bankruptcy. Some individuals who have filed for bankruptcy in the past include Abraham Lincoln, Samuel Clemens, Henry Ford, Burt Reynolds, Larry King, Cyndi Lauper, Kim Basinger, and Mike Tyson.
If you are facing a situation where you do not have the means to pay your debts and expenses and need legal protection from your creditors to stop collection action, contact Dixon Gardner at Madison Law, APC for a free consultation on whether a personal bankruptcy—either a Chapter 7 or a Chapter 13 bankruptcy—is a good option for you.
[i] See https://www.justice.gov/ust/eo/bapcpa/20191101/bci_data/median_income_table.htm for the median income based on state and family size.
[ii] See our previous article on business bankruptcies for more information on Chapter 11 bankruptcy.