Many people have experienced financial hardship due to the COVID-19 pandemic’s broad impact on the economy. While bankruptcy is one option for those who are struggling, there are other pathways to financial relief. By understanding changes in federal bankruptcy laws enacted over the last year and how courts define “material financial hardship,” among other details, you will be able to make an informed decision.
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How have bankruptcy laws changed due to COVID-19?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act changed or amended several laws related to both business and personal bankruptcy. Some individuals may qualify for an extension on their bankruptcy repayment plan claiming “material financial hardship” due to COVID-19, while others who have considered bankruptcy may not have to file at all.
Under the CARES Act, individuals who already filed under Chapter 13 and established payment plans may request certain changes if they suffered “material financial hardship” due to COVID-19. But, even if you are struggling to make ends meet, only the court can determine your eligibility for relief.
What is considered a “material financial hardship” from COVID-19?
Section 1329 of the Bankruptcy Code was amended to change eligibility for financial relief in light of the pandemic. Debtors may request modifications to their Chapter 13 plan to lower payments or extend the payment period. Specifically, Chapter 13 payment periods can now last up to seven years, adding as many as two years to the established five-year limit.
Debtors must prove material financial hardship caused, either directly or indirectly, by COVID-19. But what, exactly, does this mean?
The CARES Act does not specifically define “material financial hardship,” leaving those determinations to the courts. Generally, the term refers to economic hardship that poses a threat to health and well-being because it limits or restricts access to food, shelter, and other essential needs. Job loss and loss of income are typically cited, but there are other elements as well. Based on recent case law, the definition of the term as it relates to bankruptcy laws can be rather broad:
- In re Fowler, No. 16-31791 – Fowler was on a fixed income and argued that after the pandemic her expenses increased because she had to care for several family members who were sick.
- In re Lewis, No. 19-32243 – Lewis argued that as a result of the pandemic, her hours at work were reduced which lowered her income.
In both of these cases, the court lowered the payment amount and extended the length of the plan.
How do I modify my Chapter 13 repayment plan?
If you already have a Chapter 13 bankruptcy plan in place but you are having trouble making payments, you may be able to modify your plan. When determining your payment plan, factors such as income, type (and amount) of debts, expenses, and any nonexempt property owned are taken into account.
- Types of debts – Debts like child support, alimony, and certain tax obligations are required to be paid in full. Medical debt, credit card debt, and personal loans are not required to be paid in full. If the bulk of your debt is the type that must be paid in full, it could diminish your ability to lower your payment.
- Nonexempt property owned – A Chapter 13 bankruptcy requires that your unsecured creditors are paid at least as much as if you had filed Chapter 7. Unsecured creditors would have, under Chapter 7, been entitled to your nonexempt property value. The plan is required to pay the amount they would have received. If you have to pay a specific amount to your unsecured creditors it could prevent you from reducing your payment.
To modify your plan, you must file a motion with the court and notify the bankruptcy trustee and all of your creditors. Typically, a motion to modify must be accompanied by:
- A written declaration detailing why your payment on your Chapter 13 plan should be reduced.
- A scheduled hearing date.
- A proposed new Chapter 13 payment plan.
Your trustee and creditors will have the opportunity to review the proposal. If the creditor or trustee objects to the amended plan, they will have a chance to explain their position to the judge, who will then issue a ruling.
What other CARES Act provisions might help me with bankruptcy?
The CARES Act has several other provisions that, while not directly related to bankruptcy, can provide financial relief:
- Independent contractors may be eligible for unemployment benefits.
- Some states are extending unemployment benefits.
- Some states are increasing unemployment benefits payments.
- The IRS continues to issue economic impact payments to eligible individuals and families as authorized by law.
- Economic impact payments and other benefits received from the CARES Act are not considered “income” for the purposes of determining eligibility for bankruptcy, nor are they considered “disposable income.”
Get informed before you file for bankruptcy protection
COVID-19 has changed many aspects of our lives over the past year. Individuals and businesses hit hard by the pandemic have considered or filed for bankruptcy to get some financial relief. If you have questions about your bankruptcy or think you may file for bankruptcy, reach out to a Rocket Lawyer On Call® attorney for fast and affordable advice about your particular situation. For COVID-19 legal advice and information, check out the Rocket Lawyer COVID-19 Legal Center.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.