Impact of COVID-19 on Bankruptcy Laws: A Review

Impact of COVID-19 on Bankruptcy Laws: A Review
04 - Oct - 2023
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In 2020, a global health crisis altered many aspects of daily life, including bankruptcy laws. As COVID-19 spread rapidly, legislative bodies acted swiftly to modify financial regulations. A host of changes came into play, affecting both individuals and businesses considering bankruptcy to manage debt. Among these alterations were amendments to Chapter 7 and Chapter 13 regulations, designed to create more lenient conditions for filers. Additional provisions from economic stimulus packages like the CARES Act also played a role in these adjustments. Through such amendments, lawmakers aimed to provide some breathing room to those grappling with financial instability due to the pandemic. While some changes are temporary, others could reshape bankruptcy legislation for years to come.

Understanding Bankruptcy Code Alterations: Amendments Stemming from COVID-19

The pandemic not only affected public health but also led to significant shifts in bankruptcy code. Lawmakers, understanding the financial strain placed on individuals and businesses, passed amendments to ease this burden. One noteworthy change involved income calculations for Chapter 7 and Chapter 13 bankruptcy cases. The Coronavirus Aid, Relief, and Economic Security (CARES) Act explicitly stated payments received from federal relief funds should not be considered as income for means testing.

Another important alteration was the introduction of Subchapter V under Chapter 11, designed to streamline the bankruptcy process for small businesses. This new option lowered the costs and simplified the plan approval process, making it more accessible for struggling businesses.

Adjustments were also made to Chapter 13 rules, allowing for greater flexibility in modifying repayment plans in light of financial hardship caused by the pandemic. These legislative changes demonstrated a proactive approach to mitigating the economic challenges posed by COVID-19, effectively making bankruptcy proceedings more adaptable and forgiving.

Emergency Economic Stimulus: How CARES Act Relates to Bankruptcy Filings

When the CARES Act was signed into law in March 2020, its primary focus was economic stimulus—getting financial help to businesses and individuals affected by COVID-19. However, tucked within its provisions were several items directly impacting bankruptcy filings. One significant feature was the exclusion of stimulus payments from calculations of “current monthly income,” a key factor in eligibility for both Chapter 7 and Chapter 13 bankruptcy. By not including these funds as income, lawmakers made it easier for people to qualify for bankruptcy protection if they needed it.

In addition, the CARES Act allowed those with existing Chapter 13 plans to extend their repayment period for up to seven years, rather than the typical five years. Given the uncertainty surrounding jobs and incomes, an extension can provide a lifeline to those struggling to meet their original repayment terms.

Shifts in Chapter 7 Bankruptcy: From Eligibility to Discharge

Changes in Chapter 7 bankruptcy laws during the COVID-19 era have been geared toward easing eligibility requirements and facilitating smoother discharge processes for debtors. For instance, the inclusion of stimulus checks as non-countable income in means tests made it less stringent for people to qualify for Chapter 7. Previously, individuals or families with income above a certain threshold were not eligible for Chapter 7 and had to file under Chapter 13 instead.

Alterations also touched on the discharge process, where certain non-dischargeable debts became more lenient. While student loans, for example, usually cannot be discharged through bankruptcy, there has been growing advocacy to loosen these rules, particularly given the financial hardships exacerbated by the pandemic. Although no concrete changes have been enacted yet, discussions are ongoing, suggesting potential future shifts in what can be discharged under Chapter 7.

Evolving Landscape of Chapter 13 Bankruptcy: Modifications and Flexibility

Amid the financial uncertainties ushered in by COVID-19, Chapter 13 bankruptcy laws have seen revisions aimed at providing added flexibility and leniency. One of these key changes is the permission granted to extend repayment plans. Under the CARES Act, debtors with existing Chapter 13 cases could stretch their repayment periods from five to seven years, offering them additional time to fulfill their obligations.

Another shift has been in the allowance of mid-case modifications to repayment plans. In response to the pandemic, courts became more receptive to modifications to accommodate decreases in income or unexpected expenses. Debtors now find it slightly easier to adjust their ongoing repayment terms if they face hardships such as job loss or medical emergencies.

Moreover, some jurisdictions have implemented measures to pause payments temporarily without fear of case dismissal. Normally, missed payments could result in a case being thrown out, leaving the debtor unprotected from creditors. Temporary moratoriums on such actions have given debtors a much-needed reprieve.

Moratorium on Foreclosures and Evictions: Effects on Personal Bankruptcy Cases

The pandemic’s financial fallout led to an uptick in personal bankruptcies, but it also prompted a series of moratoriums on foreclosures and evictions. These temporary pauses provided immediate relief for many facing the loss of their homes. But how did these moratoriums intersect with bankruptcy cases?

Firstly, moratoriums provided a safety net for those during Chapter 13 repayment plans. If a debtor fell behind on mortgage payments, the moratoriums temporarily halted the risk of foreclosure, allowing time to adjust repayment plans.

Secondly, the pause on evictions and foreclosures indirectly lowered the urgency for some to file for bankruptcy for the sole purpose of halting such proceedings. As a result, potential filers had more time to assess their financial situations, consider alternatives, and if necessary, prepare a more organized bankruptcy filing.

Lastly, for those already in a Chapter 7 process, the moratoriums offered extra time. While Chapter 7 doesn’t usually allow for the curing of mortgage arrears, the pause provided a window to either convert to Chapter 13 or negotiate directly with lenders.

Unemployment Surge: Correlation with Personal Bankruptcy Cases

COVID-19 Impact Bankruptcy

A skyrocketing unemployment rate has been one of the most visible economic impacts of the COVID-19 pandemic. In Wisconsin, 114,000 jobs were lost between March 2020 and August 2021. As businesses closed doors and laid off workers, personal finances took a hit, resulting in a surge of bankruptcy filings. But what is the correlation between rising unemployment and personal bankruptcy cases?

Data reveals a direct relationship: as unemployment rates climb, so do bankruptcy filings. While filing for bankruptcy can offer a financial reset, the decision comes with its own set of complexities. For those who’ve lost jobs, income-based means tests for Chapter 7 and Chapter 13 become easier to pass, making bankruptcy a more accessible option.

During the pandemic, many individuals faced financial hardships that led them to consider bankruptcy as a viable option. The COVID-19 pandemic brought about a surge in unemployment, leaving many without a steady income and struggling to make ends meet. In response to this crisis, the government provided enhanced unemployment benefits to help individuals cope with the financial strain. However, these benefits also had an impact on people’s eligibility for bankruptcy. In Wisconsin, for example, residents faced insolvency at an alarming rate. The bankruptcy relief provided during the pandemic offered a lifeline to many, but it also highlighted the link between medical diagnoses and financial issues. The financial strain caused by medical bills and lost income was a significant factor that drove people to file for bankruptcy.

However, unemployment benefits also count as income when calculating eligibility for bankruptcy. With enhanced benefits during the pandemic, some individuals found themselves in a situation where these funds affected their qualification status.For those in the Milwaukee area seeking more detailed information or assistance, the Downtown Milwaukee office of Debt Advisors can provide valuable guidance and support in understanding how these benefits impact bankruptcy proceedings.

If you are filing for bankruptcy, contact us or call us at 866-696-6432 today for a free consultation.

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