Debt Caused By The Coronavirus
We are living through some truly bizarre times.
The latest Coronavirus, named “Covid-19” has halted businesses, entertainment, social events, and caused the stock market to tumble.
The medical impact of this virus is being debated daily (and every minute), but the economic impact will undoubtedly be devastating and could last for years.
The inability of certain businesses to operate at full capacity (such as restaurants) and those relying on international commerce will suffer greatly, and many will go out of business leaving their employees without income.
The typical American worker lives paycheck to paycheck, without a large savings cache ready for events such as this. So if layoffs or reduced hours occur, how are they going to pay their bills?
This article is not advising anyone to borrow money or to incur debt, but acknowledges that it is often necessary. I will discuss the best ways to avoid bankruptcy, but also explain how bankruptcy is available if necessary and nowhere near as negative as you may think.
How To Avoid Bankruptcy From Coronavirus
You have to eat.
You have to pay your rent, gas for your cars, utilities, insurance and so forth.
So where does the money come from if you cannot work?
You could simply win the lottery.
But most will need to borrow money somehow to get through.
There are many ways to borrow money, and they are not equal in terms of problems they can cause.
The primary borrowing options are:
- Getting a loan from a bank (secured or unsecured);
- Getting a loan from friends or family;
- Borrow from 401k / retirement saving;
- Using Credit Cards to pay for things (or taking cash advances);
- Getting a Payday loan.
Which should you use to minimize your need to file bankruptcy? These are examined below.
Bank Loans To Pay Your Expenses
Loans can be either secured by collateral (such as your house) or unsecured. Secured loans give you the best terms as far as interest rates and length of repayment. For example, if you are lucky enough to own a house with equity, you could possibly refinance your existing loan or take out a “HELOC” (line of credit) to help.
Secured loans of course must be repaid according to whatever payment terms to which you agree, or else the lender can foreclose on the property.
So if you want to keep your property, increasing the secured debt against your house may not be your best option, unless you are sure you are able to make all the future payments on the loan(s).
Loans from banks may also be unsecured. But the unsecured loans will have a higher interest rate (i.e. higher monthly payment) and need to be repaid in a shorter time period.
If you don’t pay on time, you can be sued and the debt can then be converted to a secured debt (lien) against any property you may have, or wages garnished, or bank accounts levied.
Borrowing From Family Or Friends
While I am not encouraging this, borrowing from family and friends is likely the best way to handle short term financial downswings and avoid a bankruptcy if you have the ability to do so.
Friends and family tend to not be as demanding about repayment of the debts (although I have certainly seen some that are!) and are generally more flexible about repayment terms.
There are, of course, limits to how much you can impose, but as a short term solution, this might be the best option.
Borrowing From Your Retirement
While this may seem like a good idea, it is usually not a good option.
First of all, if you don’t “repay” the loans, you will end up with penalties and a tax liability, which is harder to eliminate in bankruptcy and otherwise. [pullquote]More On Using Retirement To Pay Debts[/pullquote]
But perhaps more importantly, this is your retirement. You are going to need this money later. You worked hard to set this money aside for that purpose.
Since retirement accounts are protected from creditors, most would be much better off keeping their retirement funds and filing a bankruptcy case.
Should You Use Credit Cards When Your Income Drops?
Credit cards are unsecured loans at a high interest rate. Not quite as high as payday loans, but high.
While it may become necessary, using credit cards to pay for goods and services is not the best option for dealing with a downturn in income, unless you have the ability to pay off the full balance each month or your income will return to a level where you can afford to make meaningful payments on the balance (i.e. more than required minimum payments).
The most common way credit card debt results in a bankruptcy filing is not because the users were going on wild trips to exotic countries and buying unnecessary things.
Rather, it is from situations exactly like this: When you need it to survive.
This option is only available of course if you have a job and is the one most people run to in a crunch.
It is likely the single worst option available.[pullquote]More on Payday Loans[/pullquote]
While the loan amounts tend to be quite small in comparison to other loans, the interest rates and repayment terms are unconscionable. It is no joke that the interest rates can be anywhere from 400% to over 1,000% on a loan. You can borrow a measly $500 and be paying it back for the rest of your life.
How Can Bankruptcy Help With Debts Incurred Due To Loss of Income?
Not everyone has rich relatives or friends from whom they can borrow money, or a large savings account sitting ready for there “rainy days”.
You have to feed your children, buy clothes, put gas in the car, pay for medicine, electricity, water, etc.
Sometimes ya gotta do what ya gotta do.
Fortunately, the bankruptcy laws are here for exactly this time of scenario.
And the consequences of filing bankruptcy , such as impact on credit scores, are usually far less than most think.
There are different bankruptcy chapters and each has its own pros and cons.
Chapter 7 allows you to get rid of dischargeable debts without making any payments, but you can only protect a certain amount of assets, and there are income eligibility requirements.
Chapter 13 allows you to do a repayment plan based on your budget and asset values. It has great flexibility and works for many who cannot do a Chapter 7 case. [pullquote]See More About The Different Bankruptcy Chapters[/pullquote]
Deciding which is best for your situation can only be done by having a comprehensive consultation with a qualified bankruptcy attorney in your area.
But there are a few things to keep in mind before maxing out your credit cards or taking out other loans:
Bankruptcy will only discharge (i.e. relieve you from the obligation to pay) debts that are incurred with the intent to repay them.
[pullquote]See more on how bankruptcy discharge works and which debts can be discharged[/pullquote]
Thus, you should not take out loans that you do not have a reasonable expectation of being able to pay them.
A reasonable expectation could be that you expect to return to work and you will be earning sufficient income to make the necessary payments on the loans you are taking out.
But if you have an annual income of $40,000 and you take out $40,000 of loans at 19% interest, there is no way you are going to pay that off in your lifetime.
This is not to say that you will be unable to eliminate such debts in a bankruptcy case, but the options narrow if you did not have a reasonable expectation of being able to repay them at the time you took them out.
Nevertheless, there are different bankruptcy options available depending on your circumstances and usually one that will fit your situation.
Bankruptcy Is Here If You Need It So Don’t Stress
The takeaway from this article, I hope, is that you should do what you can to avoid putting yourself in a situation where bankruptcy becomes necessary. But if you cannot, do not stress about it because bankruptcy laws are there to protect you and alleviate your debt problems. An informative consultation with a bankruptcy attorney can be a very stress-relieving first step.