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This story, Federal Aid Has So Far Averted Personal Bankruptcies, but Trouble Looms

Once federal benefits dry up, highly indebted consumers could be forced to file.

originally appeared in the New York Times on July 17, 2020 at

https://www.nytimes.com/2020/07/17/business/personal-bankruptcies-corona...

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Federal Aid Has So Far Averted Personal Bankruptcies, but Trouble Looms
Once federal benefits dry up, highly indebted consumers could be forced to file.

Credit card debt piled up for Jess Brown, and the $600 federal unemployment supplement has kept her afloat. That benefit ends this month.

Credit card debt piled up for Jess Brown, and the $600 federal unemployment supplement has kept her afloat. That benefit ends this month.Credit...Eamon Queeney for The New York Times

Mary Williams Walsh

By Mary Williams Walsh

July 17, 2020

The United States went into the Great Lockdown with the most household debt in history, stagnant incomes for all but high earners and armies of people telling pollsters they were living paycheck to paycheck. Then, for millions, their paychecks stopped.

But instead of a stampede to the bankruptcy courts, personal bankruptcy filings — a useful, if extreme, indicator of the financial health of the American consumer — dropped sharply from April through June, even as unemployment soared, according to calculations by the American Bankruptcy Institute based on data from Epiq Global, a legal research and analytics firm.

Bankruptcy Filings and Household Debt

American households had more debt than ever when the pandemic sent unemployment soaring this spring. But bankruptcy statistics have yet to reflect the struggle to manage that debt; personal bankruptcy filings are in sharp decline.

“Filings have just gone through the floor,” said Henry E. Hildebrand III, a consumer bankruptcy trustee in Nashville. Such trustees supervise the finances of people who have declared bankruptcy and agreed to pay creditors over three to five years. Mr. Hildebrand usually gets 350 to 400 new cases a month, he said, but last month he added just 107. Nationwide, the drop in personal bankruptcy filings is the biggest in 15 years.

One reason for this counterintuitive picture: The federal government’s stimulus package, which, beginning in April, has put cash into unemployed people’s hands on a weekly basis, allowing them not just to buy groceries and pay rent, but to pay down existing debt.

As of mid-June, the Treasury Department had issued nearly $270 billion worth of stimulus payments to some 160 million people. Unemployment benefits, which normally average about $340 a week, were temporarily increased by $600 a week. Some unemployed people now have more income than when they were working.

But those benefits are set to expire this month. Congress will take up the issue of whether to extend them, along with other emergency aid, when the Senate returns next week, but if no more aid is forthcoming after July — given the double-digit unemployment rate and a resurgent virus in many parts of the country — a far more dire portrait of the financial pain of millions of Americans is set to emerge in the coming months. Bankruptcy experts say consumer bankruptcy filings will then start to rise.

The banking industry is already gearing up for a wave of defaults on everything from mortgages to credit card debt. Several of the nation’s biggest banks, including JPMorgan Chase, Wells Fargo and Citigroup, said in their second-quarter earnings reports that they had added tens of billions of dollars to their reserves to cover losses they expect to incur on business and consumer loans.

Jess Brown, 42, quit her marketing job two years ago to start a small house-sitting business, but ended up crushed under more than $40,000 of credit card debt. The card companies offered her rehabilitation plans, but only if she let them automatically withdraw the payments from her checking account. That led to overdrafts and bank penalties.

Not knowing what else to do, last October she dropped out of those plans, moved in with relatives in North Carolina, changed her phone and avoided the debt collectors. She went online to learn about budgeting and compound interest and tried to research consumer bankruptcy, too, but got mostly spam from debt-consolidation companies.

Then came the pandemic. With her patchy recent earnings record, Ms. Brown was eligible for just $135 a week of regular unemployment compensation. But the supplementary $600 has kept her afloat and given her the means to keep looking for work. Ms. Brown tries not to think what will happen if the federal relief stops.

“It only brings me emotional distress,” she said.

For the economy as a whole, which is driven by consumer spending, that extra $600 a week has been “nothing short of a game-changer,” said Matt Schulz, chief industry analyst for LendingTree, the online credit marketplace. The company recently reviewed a large sample of credit card data from 800,000 users and found that unpaid balances, late payments and usage all fell from February to May, as the federal money began to flow.

“Instead of just squeaking by, that extra money has allowed many Americans to actually pay down debt and increase savings in ways that would be unimaginable under normal terms of unemployment,” Mr. Schulz said.

But even if Congress extends the relief measures, they are a temporary salve that will do little to change the long-term patterns of income stagnation and indebtedness that have left American households so vulnerable to a financial shock. Total household debt reached $14.3 trillion in the first quarter of this year, according to the Federal Reserve Bank of New York — a record.

ImageHenry E. Hildebrand III, a consumer bankruptcy trustee in Nashville. His caseload has plunged.

Henry E. Hildebrand III, a consumer bankruptcy trustee in Nashville. His caseload has plunged.Credit...Brett Carlsen for The New York Times

Most of the economic gains from the last 30 years of economic growth, except for the Great Recession, have been going to top earners, leaving the bottom half of wage-earning America struggling — and highly indebted. Research from Gabriel Zucman and Emmanuel Saez, professors at the University of California, Berkeley, showed that in 2018, those in the bottom half carried debt that was 219 percent of their income. And that’s who was hit first and hardest by the economic shock this spring.

Nearly 40 percent of households earning less than $40,000 a year had already lost at least one job by May, according to the Federal Reserve, which has been analyzing household finances closely. That compares with just 19 percent of households earning $40,000 to $100,000, and 13 percent of households earning more than $100,000 a year.

A survey done in May by the Census Bureau showed further that younger households, and those with less education and lower earnings, were likeliest to be losing income in the shutdowns. They were also likelier to say they could not make their rent or mortgage payments and had sought forbearance.

Jenny Doling, a consumer bankruptcy lawyer in San Diego, said consumers whose debts started to snowball were generally better off seeking protection in bankruptcy right away. That’s because bankruptcy automatically halts creditors’ collection efforts, giving insolvent consumers a safe place to work out their three- to five-year repayment plans, and possibly save important assets like a house or a car.

But for many, the idea of bankruptcy comes with the threat of a stigma.

“Filing bankruptcy, for consumers, is sort of an admission that you’re a financial failure, and people just can’t admit that,” said John Rao, a lawyer at the National Consumer Law Center in Boston. “They still think that they can pull out of it somehow.”

People also get sticker shock when they hear that the cheapest consumer bankruptcy case, a liquidation, is likely to cost about $1,500. In 2005, amid concerns that spendthrift consumers were abusing the bankruptcy system, Congress tightened the laws, increasing the cost of a case and requiring legal fees to be paid upfront. The next year, the number of cases fell to around 600,000 from more than two million in 2005, but began climbing again in the aftermath of the 2008 financial crisis. Last year, 752,160 cases were filed; this year, if filings continue at their current rate, there will be 590,854 by the end of December.

While consumers struggle, they often turn to their credit cards to make ends meet, thinking they will pay down the balance when they’re called back to work. In the meantime, they make just the minimum monthly required payment.

Each month’s unpaid interest, accruing at 20 percent or more, is then tacked onto their principal balance, causing their debt to balloon even if they don’t buy anything.

“It becomes completely unmanageable,” Mr. Rao said.

That’s what happened to Ms. Brown. She had good credit when she quit her job in early 2018, and lined up a series of house-sitting gigs in Europe, using her credit cards for airfare and food as she moved from country to country. She was stunned to see how fast the interest compounded. But she also found that when she hit the maximum on one card, other issuers would give her new ones. Sometimes they came with offers of a gift card if she spent a lot more money quickly.

Realizing she had no way out, she returned to the United States.

“I had a wall of credit card debt that was waiting for me,” she said. She kept trying to make a go of her house-sitting business. Then the economy went into shutdown, and people stopped traveling. “In one day I had six cancellations,” she said.

For now, Ms. Brown said, the debt collectors have been leaving her in peace. But any day, she said, she may open the door and find a process server standing there with the papers for a bank’s lawsuit.

“It’s not a question of ‘if’ but ‘when,’ and it weighs on me heavily,” she said.

IRS Means Never Having to Say….Anything The IRS is not like most creditors. (Your probably knew that.)  The IRS in bankruptcy is not like most creditors in bankruptcy, either. Knowing what debts have been cleared (discharged) by your bankruptcy is easy for most debts. For credit cards, loans (including payday loans, who want you to […]
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This story Cancel Student Loans In Bankruptcy? You May Not Qualify  Forbes July 16, 2020 originally appeared
https://www.forbes.com/sites/zackfriedman/2020/07/16/student-loans-bankr...
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Cancel Student Loans In Bankruptcy? You May Not Qualify
Zack Friedman

Can you discharge your student loans in bankruptcy? A new proposal says yes, but not everyone qualifies.

Here’s what you need to know.

Student Loans
Rep. Mary Gay Scanlon (D -PA) introduced new legislation today that would make it easier for you to discharge student loans in bankruptcy if you are struggling financially and have been impacted by Covid-19. Here’s the good news: the COVID-19 Student 5 Loan Relief Act of 2020 would apply to both private student loans and federal student loans, and be available to all Americans impacted by Covid-19.

Discharge student loans: the fine print
Now, here’s the fine print: you may not qualify to discharge your student loans in bankruptcy under this proposal. According to the bill, to qualify:

your income has been reduced due to the Covid-19 pandemic; or
the primary income earner in your family died; or
you have become permanently disabled
Most Popular In: Personal Finance

Second Stimulus Check Income Limit Will Likely Be Higher Than $40,000
New Stimulus Package May Be Introduced Next Week
Proposal: Discharge Student Loans For Those Harmed By Pandemic And Recession
Now, lets’ break down the first requirement based on the language on the bill. The legislation requires a reduction in income due to Covid-19. What does this mean? Here’s what the bill says. It’s not enough that your income simply declined. Specifically, to qualify to discharge your student loans in bankruptcy

If you make less than this pre-tax income...your income must decline by at least this percentage...

< $75,000 Income: at least 20% decline
$75,000 - $125,000 Income: at least 30% decline
$125,000+ Income: at least 40% decline
Plus, the relevant time period is “beginning January 21, 2020 and extending until 60 days after the duration of the Covid-19 emergency or the duration of the Covid-19 outbreak or as a result of the COVID-19 outbreak.” Even if you wouldn’t qualify under this specific proposal, you still may be able to discharge your student loans in bankruptcy through the normal course based on your financial situation. Traditionally, unlike mortgages or credit card debt, student loans cannot be discharged in bankruptcy. There are exceptions, however, namely if certain conditions regarding financial hardship are met.

Cancel student loan debt
This latest bankruptcy legislation is part of an ongoing effort to provide more student loan relief, particularly as as result of Covid-19. For example, Student Debt Crisis, a leading student loan advocacy not-profit, recently sent Sen. Elizabeth Warren (D-MA) a petition for student loan forgiveness with 1.2 million signatures. Warren, who proposed student loan forgiveness for 95% of Americans, has been a proponent of student loan forgiveness and student loan debt cancellation. Scanlon’s legislation would make it easier by amending Chapter 11 of the U.S. Bankruptcy Code, although the requirements to qualify may be challenging for some. Student loan forgiveness has been a hot topic in Congress, particularly in the wake of the Covid-19 pandemic. For example, former Vice President Joe Biden reiterated his support for student loan forgiveness and his support to discharge student loans in bankruptcy. Other members of Congress have proposed legislation to forgive student loans, although none have become law.

Will student loans be included in the new stimulus?
Maybe. It’s unlikely that this bill or a similar bill to discharge student loans in bankruptcy will be included in the new stimulus. The new stimulus package may be introduced next week. Currently, the focus includes second stimulus checks, state and local aid, unemployment benefits or a return-to-work bonus and liability protection due to Covid-19 for businesses. However, don’t expect student loan forgiveness to be included. However, Congress may extend student loan relief under the Cares Act, or Congress could allow the student loan relief to expire as planned on September 30, 2020. That said, student loans have not been the focus among Republicans (who control the Senate) among other high priority issues. There is bipartisan support to make student loans dischargeable in bankruptcy, but there may not be consensus to act until after the election in the next Congress.

Deciding on whether or not you should file for bankruptcy is a tough call. Some may even tell you to declare bankruptcy only as a last resort. But before giving in to the stigma, consider all possible angles in approaching your financial issues. 
The main reason why bankruptcy laws were even created was to provide debtors a chance at a fresh start. Unlike what most people think, bankruptcy is not a punishment for borrowers who were unable to handle their financial resources. In fact, the top reasons why bankruptcy declarations are considered by families is the loss of income and huge medical debt.
Factors Leading to A Bankruptcy Filing
If you find yourself in any of the scenarios described below, then you should think about filing for bankruptcy as one of your legal options.

1. Sudden medical conditions. If you have an injury or health problem, it can be difficult or even impossible to perform any gainful activity. On top of that, you’ll have to worry about health expenses piling up due to your illness. If you file bankruptcy, you get a chance at discharging those medical bills as ordered by the bankruptcy judge.
2. The threat of property foreclosure. The possibility of losing your home is scary. But if you consider filing Chapter 7 bankruptcy, you can temporarily stop foreclosure and even have unpaid mortgages discharged, or possibly keep your home permanently if you’re eligible for a Chapter 13 bankruptcy filing.
3. Creditor harassment. If your lenders demand payments night and day and threaten to seize your most valued assets, then bankruptcy can give you the good night’s rest you wanted. How, you might ask? Through an “automatic stay”, which is an order issued by the bankruptcy court that requires all your creditors to stop collecting anything from you. 
4. Living on credit card payments. If you can afford food, medicine, clothing, and shelter only by maxing out your credit limit, or if you can only pay outstanding credit loans using another credit card, then declaring bankruptcy gives you a second chance with the possibility of wiping nonsecured credit card debts.

If you find yourself in any of the situations above, you’re a good candidate for a bankruptcy case. Before proceeding, ask yourself these questions: Is it possible to negotiate a reduction of the loan amount? Can I expect my financial status to improve anytime soon? Are there other sources of debt payments I haven’t considered? If you answered YES to most of these questions, then it might still be possible to take control of your situation. However, if your issues have been a major source of stress, then talking to a lawyer experienced in bankruptcy, such as those from Northwest Debt Relief Law Firm should be considered. 
There are plenty of debt relief solutions to choose from, such as but not limited to filing bankruptcy, reaching out to an agency offering free credit counseling, considering debt consolidation or debt settlement, or researching debt management programs. Regardless of which direction you take, it is highly recommended to get advice from a legal representative who has worked with bankruptcy filings in the past. 
How Northwest Debt Relief Law Firm Can Help
During a consultation with our bankruptcy lawyer, you will be guided in choosing the right type of bankruptcy to file, which are called Chapters. One popular option for personal bankruptcies is Chapter 7. This is intended for filers who are unable to pay loans due to a low income (defined as earning less than the median income in your State) and wipes out credit card debt, medical bills, lawsuits, lease obligations, and personal loans. For those with higher income, filing Chapter 7 can be done by passing a “means test” conducted by the court trustee through an examination of income sources and expenses. 
If you do have a constant source of income, your lawyer may advise you to file a Chapter 13 bankruptcy, also called the “wage earner’s bankruptcy”. It gives you an opportunity to tweak the details of your current loan agreements and extend payments under a new repayment plan. If you are facing the possibility of foreclosure, it can also save your home. However, keep in mind that not all debts get discharged. Your student loan, unpaid child support or alimony, and taxes due will remain in your file. 
Your bankruptcy attorney will also discuss with you what happens once your bankruptcy case is closed. This will cover your concerns about your credit score, credit report, future property purchases, making payments for non-exempt assets, and facing secured debtors. Though a bankruptcy option appears challenging, remember that its ultimate goal is to give you relief from your debts. Start your journey towards this goal by calling a law firm specializing in bankruptcy law such as the Northwest Debt Relief Law Firm. Schedule your free consultation with our bankruptcy attorneys and get a grip on your financial future.
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