Personal Bankruptcies After the COVID-19 Pandemic

Bankruptcy Resulting From the COVID-19 Pandemic

The unexpected, devastating, and far-reaching economic effects of COVID will remain with our country and the world for years. People may even feel the consequences for the rest of their lives. In many cases, individuals and households will turn to personal bankruptcy in order to protect their assets from creditors.


What help can consumers access when facing bankruptcy as a result of the COVID-19 Pandemic?

Before filing for bankruptcy, consumers must meet with an approved credit counseling agency for a budget briefing that requires 30 to 90 minutes to complete. Consumers may file on their own (pro se) or with the assistance of an attorney specializing in bankruptcy. After filing, the consumer must complete a two-hour debtor education course from an approved provider* before the court will discharge the debt.

Pandemic Effects on Bankruptcies

The sudden and severe interruption to the national and international economy has affected countless households, leading to unemployment, furloughs, and business closures. Without the regular income, even with a portion available through unemployment insurance, these households have likewise fallen behind on paying bills, submitting loan payments, and staying up on regular expenses.

It comes as no surprise to anyone that the pandemic has left many families in financial shambles. For the hundreds of thousands of Americans in households whose main income earner contracted COVID-19 and ended up enduring hospitalization or succumbing to the virus, income interruption led to missed payments on everything from home loans and rents to car loans, student loans and utilities.

Medical Bills

Any household having dealt directly with COVID-19 will subsequently deal with double the financial troubles. Besides the income interruption it causes, it likely also generates tens of thousands of dollars in medical bills. For those hospitalized with COVID-19, medical bills could easily amount to over $70,000 in just five or six days.

Even with health insurance, many of the major medical policies require the consumer to pay the first $10,000 or even $20,000 of their bills. Without insurance, the medical expenses, even without hospitalization, can reach $30,000 to $40,000 in less than a week.

For those still lucky enough to afford or have a decent medical insurance policy, annual premiums, copays, and deductibles can still add up to $10,000 or more a year for the family.

Most consumers have never seriously investigated personal bankruptcy options, let alone actually filed one. Consequently, many false believe bankruptcy can’t do anything when they feel overwhelmed by medical debts and hospital bills. In reality, bankruptcy might be an option to eliminate such devastating debts.

Credit and Retail Cards

Individuals and households not contracting COVID-19 may still struggle with credit and store card accounts. As the economic fall out of the pandemic reaches into every community and many households, income reductions and interruptions mean families may need to choose between making their car payment and making dinner or between sending a child off to college and sending off a credit card payment. Many consumers have leaned more on their credit cards and store cards to pay for routine bills or, worse, support unsustainable lifestyle expenses.

When financial catastrophes hit, bankruptcy may become a valid alternative to decades of crushing debt in the future. While bankruptcy courts will not likely discharge consumers of their responsibility to repay recent frivolous credit card spending on things like a round-the-world cruise or a Prada handbag, bankruptcy may eliminate devastating credit card and store card debt for many consumers.

Home Loans

Since the massive housing devaluation of the Great Recession (which, itself, followed a three- or four-year massive increase in home prices), home prices have again rebounded and, in many areas, outpaced both inflation and income growth. Such scenarios have pushed many households to the financial brink, even without major international economic downturns.

For individuals and families whose house payment amounted to nearly half their income, any financial bump in the road will send them sliding off the path of financial stability. With any sort of income interruption, foreclosures loom large.

Saving a home from entering foreclosure is the most common reason individuals and couples file bankruptcy. When successful, the bankruptcy will still require the homeowner to continue paying their mortgage, but it often allows a resetting of the loan (known as a reaffirmation) that allows the borrower to stay in the home even with previous late or missing payments.

Car Loans

Before the pandemic, the average car payment had reached well over $500 per month. With the median monthly household income in the $5,000 range, this means Americans with car payments spend more than 10% of their means on said payments in addition to another 2% for gasoline, 2% for insurance and 1% for routine maintenance, not to mention repairs and road trip expenses.

When households with such transportation costs see their income drop by 50% to 70% due to unemployment or furloughs, it will come as no surprise that making payments to the auto lender will drop by the wayside. Repossession, like foreclosures mentioned previously, loom large.

While consumers with large car payments may find it more prudent to surrender their vehicle in bankruptcy, many often choose to keep their car, truck or SUV and continue making monthly payments. As with a mortgage in bankruptcy, reaffirming the vehicle loan with the lender essentially moves any back payments to the end of the loan.

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How Credit Counseling Certificate Helps

Lawmakers passed the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act with the aim preventing assumed abuses of bankruptcy law they believed too many consumers had committed over many years. Along with income limitations for consumers considering bankruptcy liquidation, significant changes included the requirement for bankruptcy filers to explore bankruptcy alternatives (specifically debt management through nonprofit credit counseling agencies) prior to filing in addition to the need to take a financial education course after filing their petition with the court.

To prove they have completed these tasks, bankruptcy filers must include related certificates from approved service providers showing they have met with a credit counselor and taken a personal money management class.

Many attorneys, some lawmakers, and even some credit counseling certificate providers consider the first, pre-filing certificate to offer no value to the consumer. True, the overwhelming majority of consumers seeking a credit counseling certificate have already met with a bankruptcy attorney and will still file for bankruptcy regardless of the counseling outcome. However, this does not mean the counseling serves of no value.

As one of the approved providers*, Money Fit has worked with thousands of bankruptcy filers since 2005. While only a handful have opted to pursue debt management rather than continue with their bankruptcy, most have received quality counseling, helpful personalized financial insight, and beneficial tips and ideas for preventing financial hardship in the future.

In fact, our own consumer evaluations tell us that 97% to 98% of filers believe, due to our services, they have a better understanding of the bankruptcy process, have a clearer picture of their own financial condition, and better understand their options for getting out of debt. When asked what part of the counseling service they found most helpful, common responses included:

  • All of it!

  • Everything!

  • Learning more about options and bankruptcy.

  • Making sure that bankruptcy was right for me.

  • The budget and consultation with my representative as to how to move forward and succeed in the future with better finances.

While knowledge does not always translate to action, consumers find greater confidence and optimism through the credit counseling certificate process that they are taking the right step based on facts and not just on fear and emotional reactions.

How Approved Providers Work with Attorneys and Courts

When a bankruptcy filer has selected an attorney to help him or her complete the petition and submit it to the courts, credit counseling agencies like Money Fit can coordinate the delivery of the certificate of counseling directly to the attorney. This simplifies the process for the filer, who is often overwhelmed with paperwork requests from the attorney, not to mention with the emotions of the entire process.

For filers going through the process without an attorney (known as “pro se”), credit counseling agencies offer guidance and assistance that, while not of a legal nature, offers confidence to the consumer throughout the process.

How Debtor Education Certificate Helps

Similarly to the pre-filing credit counseling service, the post-filing debtor education course provides consumers with useful information they may not get from any other source. Approximately 19 out of 20 consumers report learning something helpful during the course that they will use in their financial lives going forward. The word, “informative,” appears most commonly in reviews of debtor education programs. This should surprise no one given the fact that very few Americans have ever taken a personal financial management course in their lives, school-based or not.

How Approved Providers Work with Attorneys and Courts

In most cases, whether the filer is working with an attorney or not, bankruptcy district courts allow providers of the debtor education certificate to upload it directly to the court. While this does not relieve the filer of his or her personal responsibility to ensure the court receives the certificate, it does streamline the process. Money Fit, like many certificate providers, also provides the certificate of debtor education directly to the filer and to the filer’s bankruptcy attorney who, many times, prefers to submit the certificate themselves.

When You Should Meet with a Credit Counselor

While lawmakers intended consumers to meet with credit counselors in order to prevent frivolous bankruptcy filings, reality differs quite a bit. Most consumers who file for bankruptcy avoid seeking assistance as long as possible, first hoping to take care of their financial challenges on their own and then, last minute when possible remedies no longer exist, turning to a bankruptcy attorney, a document preparation service or to the bankruptcy court directly for protection. By then, any potential benefit of working with a credit counselor to set up a debt management plan has long passed.

The best time to meet with a credit counselor is the moment you realize you are dealing with monthly debt payments you cannot sustain.

  • If you carrying balances on credit card and store cards with interest rates in the upper teens, 20% or even 30% or higher range, meet with a nonprofit credit counseling agency to discuss debt management now rather than later to discuss bankruptcy.

  • If you have incurred medical debts and have hospital bills that overwhelm your income, meet with a nonprofit credit counseling agency to discuss debt management now rather than later to discuss bankruptcy.

  • If collection agencies call you regularly to demand full balance payments you cannot afford, meet with a nonprofit credit counseling agency to discuss debt management now rather than later to discuss bankruptcy.

  • If utility and cell phone companies hound you for payment of old accounts and will not let you open new accounts until you pay them their full amount, meet with a nonprofit credit counseling agency to discuss debt management now rather than later to discuss bankruptcy.

Related Questions

Where can you find approved providers of credit counseling and debtor education certificates? Providers of credit counseling and debtor education certificates required for bankruptcy must get approval from the Executive Office of the US Trustee. Find approved agencies in each state at this link:

Can you file bankruptcy if you are in a debt relief program? Yes, you can file bankruptcy whether you are in a debt settlement, debt management, or other form of debt relief program. Common limitations to filing bankruptcy typically involve how long it has been since your last bankruptcy filing or whether you earn too much to file a Chapter 7 bankruptcy petition.

* The United States Trustee Program does not endorse or recommend any particular credit counseling agency or debtor education provider, or guarantee the quality of its counseling or instructional services.