For most Americans, it’s unusual to get a work phone call outside of normal business hours, let alone at midnight on a Saturday.
Six months ago, George Tadross would have agreed. But over the past few weeks, the Philadelphia-based bankruptcy attorney has been fielding calls at all hours, including late nights on weekends.
“The volume of calls is through the roof, and the tone and tenor is outright panic,” Tadross tells CNBC Make It. “People are freaking out.”
The panic is due, in part, to the fact that over the last month, nearly 22 million Americans have filed unemployment claims as cities and states around the country continue to order Americans to shelter in place in an attempt to mitigate the public health fallout from the coronavirus.
The number of Americans out of work could continue to grow exponentially. Economists with the St. Louis Federal Reserve estimated that the total number of Americans without a job could hit 47 million, or about a 32% unemployment rate, according to research released in late March.
Without work, many Americans worry about their ability to pay rent and other bills, as well as buy essentials such as groceries. About 58% of Americans say they’ve already lost income because of coronavirus, according to TransUnion’s online poll of over 3,000 U.S. adults. Of those, nearly seven out of 10 are worried about paying their bills and making good on loans.
But even if you are facing a shortfall, declaring bankruptcy to wipe out your debts may not be the answer, Tadross says. “A lot of people call me, and they want to jump right into bankruptcy. I tell them, ‘Look, don’t just jump right into that — give it some time,'” he says.
Here’s what financial experts say you should understand about the process, and the steps you should take before filing for bankruptcy.
Understand your options
Whenever someone is facing a situation where their debt is spiraling out of control, Tadross says there are basically three options:
- Pay the minimum on all your bills, stay current and tough it out as long as you can and hopefully your work picks up
- Negotiate a settlement of some kind with your lenders
- File for bankruptcy
Usually it doesn’t make sense to jump right into bankruptcy, Tadross says. Instead, Americans should focus on working with their bank and loan servicers to get some immediate help to lower or put off their payments. Many times, you can get back on your feet without filing for bankruptcy.
“Bankruptcy should be the very last resort, but especially now during the Covid-19 crisis,” Jack Gillis, executive director of the Consumer Federation of America, tells CNBC Make It.
Call your lenders first
Banks, lawmakers and regulators are rolling out a number of assistance programs. Consumers should take full advantage while they can.
The $2 trillion Congressional relief package, for example, not only blocks lenders from starting foreclosure proceedings on federally backed loans, it also gives homeowners experiencing financial hardships the option to request up to 180 days of forbearance on their mortgage.
If you’re being impacted, call your lender and tell them you need some assistance — and do so before you start to incur late fees.
“The key is to be proactive,” Gillis says. “Many companies are arranging special payment plans, forgiving late fees and suspending mortgage and rent payments — however you need to ask for these forbearances,” he adds, saying that consumers should keep a careful record of the conversation they had with customer service, including the rep’s name and details of the offer’s terms.
If you have a private loan, your level of assistance will vary, and you may not get the full 180 days, but take whatever forbearance you’re offered to give yourself some breathing room.
“We don’t know what it’s going to be like — maybe it’s two more weeks, maybe it goes on for two more months. And even then, the temporary relief may not be enough. But at least it’s a first step,” Tadross says.
Once the relief program ends, you may need to take additional actions
Forbearance and deferment programs will only last so long, and then you’ll need to pay your bills. And some lenders may even require you to pay all your missed payments at once. If you’re still struggling at that point, it may be time to ask your lender for some longer-term relief such as lowering the interest rates or monthly payment amount on your mortgage, auto loans or credit cards.
Underwater on your mortgage? You can apply for a loan modification that will rework the terms of your mortgage. Typically, if approved, you can reduce your monthly payment to a more affordable amount. This step requires you to file paperwork with your loan servicer.
While you can self-submit the application, Tadross says it may be better to work with an expert who specializes in this. If you do hire an attorney, expect to pay a flat rate of about $2,500 to have the paperwork compiled and processed. You can also reach out to a HUD-approved housing counselor, who will work with you for free to compile the necessary paperwork for the application.
When it comes to credit card debt, Tadross says the best thing to do is negotiate a debt management plan or a settlement, where you work with a non-profit debt counselor to consolidate all your outstanding debt into a single monthly payment that you pay off over the course of three years. Usually your counselor will negotiate a lower interest rate for you while you’re working to pay off your balances.
If it’s becoming increasingly clear you probably won’t repay your credit card debt in full, you may want to consider a settlement. Some credit card companies may agree to wipe out your total overdue balance if you can cobble together a lump sum payment that covers a portion of your debt. As an example, a credit card company may accept a $2,000 payment on a $5,000 balance.
That said, if you’re up-to-date with all your payments, no creditor will settle with you, Tadross says. “The only way to settle a credit card debt is to fall behind. I’m not saying that people should be doing it intentionally, but I also know that it’s just going to happen on its own,” he says, adding that when you’re several months behind, you’re more likely to be able to negotiate down what’s owed, but the timeline will vary by creditor.
Of course, not paying your credit cards will impact your credit score, as will settling. A missed payment negatively affects your score, and the higher your credit before you skip a bill, the more impact you will see, John Ulzheimer, an expert on credit scores and credit scoring, tells CNBC Make It.
What bankruptcy typically looks like
If you do end up filing for bankruptcy, there are generally two types that individuals file: Chapter 7 and Chapter 13.
A Chapter 7 bankruptcy is all about selling anything valuable you own — a second vehicle, a vacation home, collectibles, stocks, bonds — to pay off your debts. Generally, this type of bankruptcy wipes out all of your outstanding debts once a judge approves your filing in court. The whole process typically takes about three to five months. Chapter 7 bankruptcies are best suited for those who cannot pay back all, or a significant portion, of their balances. Tadross says that he typically recommends clients file for Chapter 7 bankruptcy if they have an unmanageable amount of unsecured debt, such as medical or credit card.
A Chapter 13 bankruptcy, referred to as a reorganization bankruptcy, is designed for those with a regular income to create a plan to repay all, or part, of their debts in installments. It works well if you are so far behind on your home mortgage payments that you may be facing foreclosure or eviction. With this type of bankruptcy, you generally don’t have to sell off your property to pay your lenders, but instead work to pay off your debts through a court-approved consolidated repayment plan that runs for a set period of time, typically three to five years. At the end of that period, any remaining unpaid debts are discharged.
For both Chapter 7 and a Chapter 13 bankruptcies, you will have to go to court and get a judge to sign off on various aspects of your case. Right now, many federal courts are still open during the coronavirus pandemic, but most are not holding in-person hearings, and courthouses are closed to the public. Instead, proceedings are taking place remotely when possible, although some cases have been postponed.
Filing for bankruptcy does cost money
Despite the fact that most people file for bankruptcy because they can’t make good on their debt payments, the process isn’t free. Consumers need to pay filing fees and most will need to hire an attorney to help you through filing process (though it’s not required).
Chapter 7 and Chapter 13 cases typically cost between $300 and $350 for filing fees, according to the National Bankruptcy Forum. You may be able to pay the filing fees in installments; most courts will allow it if you can show it would be a financial hardship to pay all at once.
If you hire an attorney, that’s an additional expense. For a Chapter 7, you can expect to spend between $1,500 and $2,000 in legal fees, depending on the complexity of your case, Tadross says. These fees need to be paid before the Chapter 7 is filed in court to avoid any issues with your attorney becoming another creditor.
For Chapter 13, it’s a bit more expensive, generally around $2,500 to $3,500 for the case. That’s because many Chapter 13 bankruptcies can take up to five years to resolve, and the attorney will need to continue to manage your case. But, in these cases, you usually can pay the attorneys’ fees over time.
If you decide to move forward with the process, you can ask friends and family for recommendations, or contact your local bar associations. Before hiring anyone, however, check out their rating and information on the legal directory Martindale and make sure you have a conversation with the attorney who will be handling your case to ensure you’re comfortable with their approach.
If you need bankruptcy protection, make it count
There’s a limit on how often you can apply for bankruptcy, which is why Tadross recommends his clients think very carefully about it before going that route. The danger of jumping into a bankruptcy head-first right now is that you may end up incurring more debt over the next few months. If that happens, and you’ve already filed, then you won’t have a lot of options to wipe out your new debt.
If you file a Chapter 7 bankruptcy and receive a discharge of your debt, you can’t file again for eight years. If you file for Chapter 13, you’ll need to wait six years before you can file for a Chapter 7 bankruptcy. If you want to re-file for Chapter 13 bankruptcy again, the waiting period is two years.
It’s important to consider the timing. Will you see any benefit now? For example, if you’re about to lose your home or your car is going to be repossessed, then filing for a Chapter 13 and stopping the immediate foreclosure may help. Several states and cities have halted foreclosures and those with federally-backed mortgages are protected for now, but many homeowners who aren’t covered by these measures.
If you just lost your job or were furloughed because of the coronavirus, but expect to be rehired once business resumes, then it may be best to wait, says John Rao, an attorney and bankruptcy expert with the National Consumer Law Center.
It may seem like the end of the world if you’ve lost your job and can’t pay your bills, but a lot can happen between now and when life starts to return to normal. If you don’t have good health insurance, for example, imagine what would happen if you needed to be hospitalized with Covid-19. You could be looking at tens of thousands of additional medical debt.
Yet if you’ve already filed for bankruptcy protection, you may not have as many options. “Now you’re really worse off because you can’t file again, and you have no way of dealing with that debt,” Rao says.
Bankruptcy is not the end of your financial life
If you can no longer afford to pay your bills and you haven’t been able to negotiate better terms with your lender, then it may be time to consider bankruptcy. Don’t beat yourself up over it too much, Rao says.
Filing for bankruptcy is often seen as this admission that “I’m a failure,” but that’s not usually the case, he says. And while it’s a step most people don’t want to take, bankruptcy can provide a lot of relief if done right.
“It really does provide that fresh start,” Tadross says, adding that once your Chapter 7 bankruptcy is approved, or you receive a discharge in your Chapter 13 case, you’re completely debt-free.
Chapter 13 bankruptcies can stay on your credit report for three years, while Chapter 7 cases disappear after 10 years. But that won’t prevent you from getting approved for credit.
Quite the opposite, Tadross says, adding he usually advises clients that they will likely receive dozen pre-approved credit card offers within a week of completing their bankruptcy. Why? Because creditors know you’re debt-free and that you’re not going to be able to file for another bankruptcy for several years.
Debt can feel like an albatross around your neck, Tadross says, but you shouldn’t feel humiliated that you’re taking steps to rectify it through bankruptcy. “You’re just making arrangements to catch up on what you owe — it’s not the end of the world,” he adds.
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