Opinion: Why bankruptcy must be an option for homeowners and small businesses to survive this COVID-19 recession

Few Americans are unaffected by the recession and economic turmoil COVID-19 has caused, with unemployment numbers reaching Great Depression levels and millions in need of temporary benefits such as mortgage forbearance or extension of unemployment insurance. With the pandemic’s obvious end in sight, it is increasingly clear that many Americans are sitting on a financial time bomb.

If the United States is to avoid a disastrous repeat of the Great Recession, there must be a determined response from the government. What Americans need now is a substantial overhaul of the US bankruptcy code. Without this lifeline, millions of Americans could lose their homes, setting off a chain reaction that will slow the recovery and cripple the US economy for years to come.

So far, federal and state government efforts to provide relief to Americans blinded by COVID-19 have helped stem the bleeding. But for many, these measures came too little, too late. Despite more than 16 million people unemployed, efforts to pass a second federal aid package have stalled, creating the real possibility that politicians’ lack of progress will accelerate the speed and scale of the wave of bankruptcies – a wave that would overtake the 2008 downtown economic crisis and possibly become the worst financial crisis of our lives.

The numbers are grim – currently, non-housing debt stands at over $ 14 trillion and over 7% of residential mortgages are in arrears. This means that millions of people can no longer honor their debts, given the scale and extent of this pandemic.


Far from being a way out of financial obligations, bankruptcy is a key part of the social safety net for those who have been battered.

Far from being a way out of financial obligations, bankruptcy is a key part of the social safety net for those who have had a bad hand – and you’d be hard-pressed to find a hand worse than COVID-19. Bankruptcy is a vital and even necessary way for honest people struggling with finances to seek redress.

The most common causes of personal bankruptcy are job loss, medical problems, and divorce. In the current crisis, bankruptcy can really be the only real solution for many families and small business owners who never dreamed they would need it. It should be seen as essential to surviving the recession for some Americans, such as unemployment insurance, loan forgiveness, Paycheck Protection Program (P3) loans and other relief measures.

Yet the American Bankruptcy Code has not evolved to cope with today’s global crises. Whatever the intentions of Congress in passing the Bankruptcy Abuse Prevention Consumer Protection Act (BAPCPA) of 2005, it is clear that they did not anticipate the seismic economic shocks Americans have experienced since then. As a result, there remain significant barriers to accessing bankruptcy relief that make rapid and meaningful recovery unattainable for many families.

In May of this year, the House of Representatives took an important step towards overturning this obstacle by passing HR 6800, also known as the “HEROES Act”. The bill includes provisions that would provide critical relief to those overwhelmed by the impact of COVID-19.

For example, it would increase the exemption floor for family properties so that debtors forced to file for bankruptcy due to the pandemic do not lose their homes to a financial disaster that is well beyond their control. The legislation would protect debtors from seizure by trustees of their COVID-19 benefits, often the only resource between them and deprivation, during the bankruptcy process. And it would dramatically expand the access and effectiveness of Chapter 13 bankruptcy by increasing debt limits for filing and providing more flexible options for discharging debts or expanding repayment plans.

This bill is a step in the right direction. It is now incumbent on the Senate to develop a companion bill that goes all the way to relieve debtors and provide light at the end of the tunnel. There is more that can be done, including giving Chapter 13 debtors options to process mortgage payments where there has been a forbearance on those payments, as well as expanding the provisions for loan debt relief. expensive students. One thing is clear: doing nothing is not an option.

Without decisive action, Americans who have lost their jobs or businesses due to disasters beyond their control will be mired in crushing debt that they will not be able to repay. They will not soon be reverting to the winning, spending and investing behavior that will be essential for the US recovery. The long-term health and competitiveness of the US economy will suffer from this mistake.

Bankruptcy reform is the fresh start – and the economic kickoff – we desperately need. It’s a solution to the bipartisan call, and with the pandemic not expected to end anytime soon, it’s time for Congress and the Trump administration to come together to make it a priority.

John C. Colwell is president of the National Association of Consumer Bankruptcy Attorneys.

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