When Is Bankruptcy the Right Move?
Kiplinger's Personal Finance|March 2021
Seeking protection from creditors can provide a lifeline, but there are plenty of trade-offs.
​​​​​​​RIVAN STINSON

THE COVID-19 PANDEMIC IN the U.S. officially turns one year old in March. But de­ spite statewide lockdowns, business closures and wide­ spread layoffs triggered by COVID, personal bank­ruptcy filings have not increased. Data through November from the Ameri­ can Bankruptcy Institute shows that filings were down 35% from 2019.

Robert Lawless, a professor at the University of Illinois who specializes in bankruptcy law, credits the economic stimulus enacted in early 2020, which in­cluded a moratorium on debt collections, for the decline in bankruptcy filings. Fami­ lies are spending less and saving more, which is also slowing filings, he says. But this trend could change in the months ahead. In his research, Lawless has found that people tend to struggle financially for two to three years before deciding to file for bankruptcy. If you’re worried about not being able to dig yourself out from under your debts, here’s what you need to know.

Two options. Personal or consumer bankruptcy is separated into two sections, or chapters: Chapter 7 and Chapter 13 (business bank­ ruptcies are known as Chap­ ter 11). Chapter 7 bankruptcy, also known as a liquidation, is simpler to file and takes less time to complete. Most people opt for Chapter 7 be­ cause it allows you to wipe out most of your debts. How­ ever, it also requires you to sell most of your assets, such as your house and any in­ vestments you own, to pay your creditors. Chapter 13 is designed for people who have enough stable income to pay back some of their debts through a repayment plan. In a Chapter 13 bank­ruptcy, you can keep all of your property, including your house.

Although Chapter 7 pro­ vides the opportunity for a fresh start, it also takes a bigger toll on your assets. Plus, not everyone is eligible for Chapter 7. A lawyer will determine whether you qualify based on your state’s household income require­ments, which vary consider­ ably. For example, in Califor­nia, a family of four with an annual gross (before tax) income of less than $101,315 qualifies for Chapter 7. In Arizona, a family of four must make less than $86,950.

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