How a Loss of Income Can Open You to Chapter 7 Bankruptcy Protections
The COVID-19 pandemic has unfortunately ravaged the United States economy and continues to restrict what types of businesses can normally operate, resulting in record unemployment and unprecedented layoffs across numerous industries. Losing a job in any circumstance is both disappointing and frightening, but the fraught economic environment has made seeking new employment especially challenging.
Many managed to make ends meet through the CARES Act, a federal piece of legislation that augmented unemployment benefits. However, that element of the program has since ceased, with no additional financial assistance on the immediate horizon for many Americans. This leaves many in an impossible position: You may have lost your job, but no new opportunities are available. Still, debt continues to mount for credit cards and medical expenses. While there has been some relief on evictions, debt is still piling up. What are you to do?
One glimmer of good news is you may now be eligible for Chapter 7 bankruptcy as a result of your loss of income during COVID-19. Below, we walk you through how this might be possible and how it could benefit your situation.
How the Means Test Favors Those Who Have Lost Employment
People unfamiliar with bankruptcy may not realize that you must meet certain conditions to qualify. Generally, individuals are either eligible for Chapter 7 or Chapter 13 bankruptcy. The state of New York’s Means Test determines for which you can file. Through this test, the state is attempting to determine if you have enough disposable income to at least partially repay creditors. If you have lost your job due to COVID-19 and are struggling to find meaningful employment, there is a good chance you do not have the means to repay creditors at all.
The Means Test takes place in two parts, though the first is likely all you will need to consider if you have lost a significant amount of income during the pandemic. You will need to tabulate all of your income for the 6 months prior to your filing for bankruptcy. If that income is below the median income for your household size in New York, you are eligible for Chapter 7 bankruptcy, and there is no need to continue with the rest of the Means Test.
In other words, if you lost your job and have been unable to find new work for the past several months due to COVID-19, you almost certainly will qualify for Chapter 7 bankruptcy, even if you did not before when you were still employed. Unlike Chapter 13 bankruptcy, you will be able to discharge unsecured debts without being subject to a multi-year repayment plan.
If your income still exceeds the New York median for your household size, it may be because you have not waited long enough since you lost employment. Remember that the Means Test only covers the 6 months before you file. If you were only laid off 2 months ago and had a higher than average salary, for example, your income is probably still too high. While this can seem counterintuitive, if you wait a few more months, you will likely automatically qualify as your average income drops.
Why You Should File Before Returning to Work
If you were only furloughed or are poised to accept a new position soon, you should file for Chapter 7 bankruptcy as soon as possible, so long as you qualify via the Means Test. This is because your income will dramatically rise once you accept new employment, possibly putting you above the New York median income for your household and preventing your eligibility for Chapter 7.
You can most likely still file for Chapter 7 bankruptcy if you know you are returning to work soon, so long as your income over the last 6 months is lower than the medium threshold. The Means Test only examines the 6 months before the date of your bankruptcy filing, not what comes after. If you wait too long and restart work, you may only qualify for Chapter 13 bankruptcy. This does still allow you to discharge unsecured debts (which we will discuss more below), but you will also have to commit to a 3-5 year repayment period in lieu of liquidation.
Advantages to Filing for Chapter 7 Bankruptcy
Filing for any type of bankruptcy lends you significant advantages, including the automatic stay, which is a court order that prohibits any further collections actions against you. This means any evictions or repossessions in progress will be frozen, so you can potentially save your home or vehicle through filing.
Chapter 7 bankruptcy specifically involves a process called “liquidation.” That can sound intimidating, but an experienced bankruptcy lawyer can optimize your estate to minimize the impact of the process. In essence, a trustee will be appointed to manage your estate during the bankruptcy process. They will inventory your nonexempt property and “liquidate” it, using the proceeds to repay creditors. The good news is, you are able to strategically exempt a great deal (if not all) of your property, protecting it from liquidation.
New York has one of the more generous sets of exemptions in the country, but an experienced attorney can assist you in determining whether you stand to benefit more from the state’s exemptions or the federal exemptions. You get to choose, and each offers advantages and disadvantages. Again, the goal is to safeguard as much of your property as possible. Every case is different, but with the right approach and deployment of exemptions, you will not lose much or any of your property.
Once the liquidation process has been completed, a bankruptcy court can discharge your unsecured debts. Unsecured debts refer to any debt that is not tied to collateral, so think credit card balances, medical bills, unpaid utilities, and some types of personal loans. This is the chief advantage to Chapter 7 bankruptcy, as it frees you of the burden of what can be much of your debt load and gives you the opportunity to get the rest of your finances in order.
Get Assistance with Chapter 7 Bankruptcy
With bankruptcy, timing is everything. It is not for everyone, but for many faced with perilous amounts of debt, Chapter 7 bankruptcy can be a financial lifesaver. As COVID-19 continues to upend the job market, you may need to explore legal tools you never considered before. It can be easy to become overwhelmed by the process or not understand if it makes sense for you, and our attorney at Robert H. Solomon, PC can help. We have decades of experience assisting our Long Island clients in all areas of bankruptcy and are prepared to help you through the process in these turbulent times.
If you have lost a job during COVID-19 and are wondering if Chapter 7 bankruptcy might make sense for you, call (516) 407-8199 or contact us online to request a free consultation.