As the Chapter 13 Trustee for Eastern Massachusetts, Carolyn Bankowski has been overseeing all personal bankruptcies in the region for the past 14 years. Recently, she said, the number of bankruptcies had slowed down, thanks to the once-thriving economy. But she expects that will change now that the coronavirus has brought the economy to a standstill.
“I understand that a lot of creditors and mortgage companies are entering into forbearances right now to help people through the crisis," Bankowski said. "However, I anticipate that in about 90 days or so, when things start going back to normal, people are going to need help.”
Bankowski said that's even with the $1,200 to $2,400 stimulus checks coming from the federal government, and along with an extra $600 in weekly unemployment benefits. “I think in reality, if people are out of work for two or more months, that amount of money is not going to help them keep up with all their obligations,” Bankowski said.
She suggested that for some, bankruptcy could be a good option. The bankruptcy code provides protections for those in debt. An automatic stay goes into effect that allows the person to get some breathing room from creditors who might want to foreclose on property or repossess an item or garnish wages. Filing for bankruptcy allows the debtor to restructure their debt, and can help one’s credit score by getting that debt off their credit report.
But Bruce McClary, of the National Foundation of Credit Counseling, said bankruptcy can have a long-lasting effect on your finances. And it can't be reversed.
“If you need to go back out and you need to get a car loan, or you need to get financing for a home, it becomes increasingly difficult to even qualify for that type of financing. And in situations where you do qualify, it can be very costly to borrow. There are higher fees, there are higher interest rates,” McClary said. He suggested an alternative. “If you have some financial resources available where you can consolidate your debt to get it under control, or liquidate items that you own to cover the balance of what you owe — most or all of it — that’s one option.”
Another option is to get help from a nonprofit credit counseling agency through a managed debt repayment program, which McClary said can help someone lose their unsecured debt within four to five years and emerge from that situation with better liquidity — and, in many cases, with improved credit. That may be true for “non-collateralized debt,” but doesn’t include things like mortgages or home equity loans.
Bankowski countered that when people don't have the money needed to repay all their debt — including mortgages — maintaining their credit score is the least of their problems.
“If somebody is behind on their debt, they already have a credit reporting problem. And bankruptcy is actually a way of improving your credit score by eliminating that debt off your credit report and starting with a fresh start,” she said.
Michael Klein, an international economic affairs professor at Tufts Fletcher School and the executive editor of the newsletter Econofact, said the large number of anticipated bankruptcies will affect credit for everyone, not just those in bankruptcy.
“This is going to be very widespread. So the creditors are going to be widely hurt by this and that will have an adverse effect on the economy,” Klein said. "There will be less credit available for all consumers and, when it is available, it will cost much more."
Klein predicted there will be many bankruptcies because of the unique nature of this recession. “I think there will be bankruptcies because this is not going to be a short, sharp recession. It's going to be protracted, and it's protracted because people have to stay home and they can't go to work," he said. "This is unlike any other recession we have seen in the last 50, 60 or 70 years.”
Klein said that bankruptcies are a symptom — not the cause — of the economic crisis, and people should not feel humiliated when seeking protection.
“People often see bankruptcy as part of a personal failure. But, if this is happening to everybody, maybe people won't be viewed as harshly for having declared bankruptcy in the spring and summer of 2020, than if they had declared bankruptcy in the summer of 2019,” he said. “Nobody should be ashamed to reach out and ask for help, especially in light of what's going in society right now. It's not the person's fault and they should reach out for the help that's available.”