By Katy Stech Ferek
Congress's federal aid package aimed at weakening the coronavirus pandemic's economic sting has several features to help financially struggling individuals who turn to bankruptcy for relief, including a guarantee they won't have to give up stimulus checks to pay off overdue bills.
Most of the provisions in the stimulus bill brokered by Senate leaders this week are designed to prevent Americans from filing for bankruptcy protection. But the legislation, which was approved by the Senate and will be considered by the House on Friday, also contains measures to protect struggling people and small businesses that do.
Last week, a Wall Street Journal survey of 34 economists predicted that the fallout from the disease could cost up to five million U.S. jobs and a drop in economic output of as much as $1.5 trillion this year.
One provision prevents people who file for bankruptcy protection from needing to turn over any federal money they receive from the stimulus package to cover past debts. The bankruptcy process requires borrowers to either turn over valuable possessions or pledge to repay a portion of their debt for several years before they can cancel the debt that remains.
"There are going to be millions of people facing financial hardship," said Rohan Pavuluri, whose nonprofit, Upsolve, helps people fill out paperwork to file for bankruptcy and has begun hearing stories from people who have lost income because of coronavirus-related shutdowns.
"Personal bankruptcy, just like in 2008, will play a critical role in the healing process of America, and I think Congress is acknowledging that," he said.
As the pandemic spreads, some bankruptcy courts have taken measures to ensure troubled individuals can get help, including eliminating the requirement that bankruptcy lawyers get in-person signatures from clients. But barriers remain for some people who are too poor to hire a lawyer and elect to file for bankruptcy themselves, Mr. Pavuluri said. While bankruptcy lawyers can put clients under court protection using online submissions, individuals who represent themselves have to hand-deliver or mail thick packets of documents in order to file for bankruptcy.
Last week, the number of people who completed Upsolve's paperwork and successfully filed for bankruptcy fell by 10%, a drop Mr. Pavuluri put down to the lack of electronic filing for people who can't afford a lawyer.
Another provision in the Senate-negotiated package lengthens the repayment period set for bankrupt people who are repaying their debt by making monthly payments.
The measure gives bankrupt individuals who have filed for chapter 13 protection up to seven years to pay off their debt goal if they experience a coronavirus-related drop in income, an extension of the current five-year limit. As of 2018, the country's bankruptcy courts were handling about 660,000 such repayment plans, according to Justice Department figures.
The stimulus would also broaden the number of small businesses that can use a cheaper and faster bankruptcy process compared with large corporations.
Nonpublic businesses with less than $7.5 million in debt can use the expedited process under the Senate legislation, up from the current threshold of about $2.8 million in debt. More than half of businesses that filed for chapter 11 protection between 2013 and 2017 had debt below $7.5 million and would benefit from the changes, according to University of Illinois law professor Robert Lawless.
Ido Alexander, a Florida bankruptcy lawyer with the firm Leiderman Shelomith Alexander + Somodevilla PLLC, said several companies hit by coronavirus-related financial problems have contacted him in recent weeks and would qualify to use the small business rules under the expanded debt limit.
Still, putting small businesses into bankruptcy remains a tricky task in the uncertain financial environment, he said. For example, he said he is worried about giving accurate financial projections and future revenue expectations to a judge for a hospitality business he is advising that may file for bankruptcy.
"There are a lot of big unknowns right now," he said.
All of the rules in the stimulus package last for a period of one year.
The provisions were pushed by several legal advocacy groups, including the National Association of Consumer Bankruptcy Attorneys, the National Bankruptcy Conference and the National Consumer Law Center.
NACBA vice president Ed Boltz said the provisions weren't tough to sell to federal lawmakers who agreed to include them in the 800-plus page bill.
"Congress is doing everything it can to prevent people from having to [file], but bankruptcy is there for this exact reason," he said.
Write to Katy Stech Ferek at email@example.com
(END) Dow Jones Newswires
March 26, 2020 08:23 ET (12:23 GMT)
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