How Coronavirus (COVID-19) Affects Bankruptcy in Colorado

Having now practiced law for 20 years (the past 18 in Colorado), I’ve seen consumer and business clients encounter numerous economic peaks and valleys, particularly with the 2008 financial crisis which generated tens of thousands of new Bankruptcy filings nationwide. Now, we’re in the midst of an unprecedented pandemic, the Coronavirus, with no end in sight to the potential financial fallout both in the United States and globally.

If only I had a nickel for the number of folks who’ve very recently told me that I’m about to get “slammed” with new work although I have consistently filed Bankruptcy cases of many different Chapters as a Denver bankruptcy lawyer since the financial crisis with great results. Nonetheless, I’ll do everything within my legal power to get you to best possible result in Bankruptcy which usually means discharging the maximum amount of debt and staving off creditor lawsuits and collection in these uncertain times. In this article, I’ll outline some of the key changes that has so far emerged in Colorado because of COVID-19 as to Bankruptcy related law and procedure.

Bankruptcy hearings: The United States Bankruptcy Court, District of Colorado, has mostly closed its doors in that the Court has temporarily changed all 341 Meetings of Creditors to hearings by phone with a call-in conference line to the trustee assigned to your case. Additionally, all non-evidentiary hearings (generally routine status hearings about non-contested matters or preliminarily in anticipation of an eventual contested matter) are now also being conducted telephonically. It remains to be seen whether trials or contested matters involving witnesses or live testimony are adjudicated by video conference or in person.

CARES Act – Stimulus Payments: The CARES Act of 2020 directs the Federal government to issue economic recovery rebates which typically total $1,200 per person or $2,400 for married couples jointly filing income tax returns, with an additional $500 per dependent, minor child. The stimulus payments gradually “phase out” for any individual earning over $75,000 annually or couple earning over $150,000 annually, with the rebate reduced depending on how high gross income exceeds these respective thresholds.

Shockingly, the CARES Act of 2020 inadvertently did not exempt (i.e. fully protect in Bankruptcy) stimulus payments from the claims of a Chapter 7 trustee seeking to collect as a fiduciary on behalf of unsecured creditors (credit cards, medical bills, deficiencies resulting from a car repossession, etc.). BUT, the United States Trustee Program has now opined that “it is highly unlikely that a trustee” would attempt to claim any stimulus on behalf of the Bankruptcy Estate so these payments should not be in danger. Thus, COVID-19 stimulus payments will very likely not be considered property of the Chapter 7 or Chapter 13 Bankruptcy Estate.

From an income standpoint, the CARES Act of 2020 did provide that any stimulus payments received are not income under the Chapter 7 Means Test or to determine monthly disposable income or applicable commitment period (three or five years in required duration) in determining a Chapter 13 repayment Plan for higher income Bankruptcy debtors. It’s unknown whether Congress will patch up this legislative snafu. As a Bankruptcy lawyer in Denver serving all of Colorado, I will make sure that local trustees do not require that any stimulus funds be used to pay creditors in Chapter 7 and Chapter 13, so that these funds be can used to pay for food, shelter and other essentials.

Chapter 13 Plan Modification: 11 U.S.C. 1329 allows a Bankruptcy debtor to modify a confirmed repayment plan to lower payments to unsecured creditors based upon changed circumstances (i.e. loss of income and/or increased household expenses). Conversely, a Chapter 13 trustee or creditor can move to modify a plan payment upwards based on a debtor’s increased income or reduced expenses.

Now, Congress has temporarily enacted Section 1329(d) of the Bankruptcy Code to allow only a debtor (and not the trustee or any unsecured creditor) in Colorado to modify plan duration (which normally has a 5 year maximum) for a Chapter 13 plan confirmed before March 27, 2020 to a 7 year maximum (starting from the date the first plan payment is due 30 days after the Bankruptcy Petition is filed) if the debtor’s monthly disposable income is directly or indirectly impacted by the Coronavirus. The Motion to Modify Plan is required to be filed before March 27, 2021 so this loophole will sunset after one year unless legislative extended.

A gray area now is that (unless Congress also fixes this glitch) Debtors who have already filed for Chapter 13 relief but who haven’t confirmed a plan as of March 27, 2020 are not eligible for Section 1329(d) protection. And Chapter 13 cases filed after March 27, 2020 also don’t currently fit into to Section 1329(d) protections. Seven years is a long time to be in Chapter 13 Bankruptcy but having two additional years to pay the same amount to secured and unsecured creditors interest free and getting a subsequent court ordered discharge of debts surely beats your case being dismissed. As an experienced Chapter 13 attorney in Denver and the rest of Colorado, I will be closely monitoring my existing cases to determine if plan modification is appropriate.

Medical bills: COVID-19 does not change the relatively easy dischargeability of medical bills incurred before filing Bankruptcy in Colorado (i.e. medical bills are incurred before the Petition date regardless of how long it takes to later receive a medical bill). So, from a strategy standpoint, it may be beneficial to wait until after any anticipated and expensive but medically necessary Coronavirus treatments are undergone before filing Bankruptcy.

Small Business Bankruptcy

Due to COVID-19, I’ve received a disproportionate share of Bankruptcy inquiries from restaurant owners, yoga/gym/fitness instructors, folks who operate boutique stores and other small business owners in Colorado often capriciously deemed by government fiat to be “non-essential” who are now (temporarily or permanently) out of business. (Even running a small business as a Denver Bankruptcy attorney during the good times is not for the faint of heart! Now add the crippling impact of a pandemic to the bottom line.)

The overwhelming majority of small business owners remain eligible to discharge all or part of unsecured debt in a personal Chapter 7 or Chapter 13 Bankruptcy (without having to also expend further resources to file Bankruptcy in the name of the business absent extraordinary circumstances) while keeping all personal assets, mostly notably a house with equity. (Colorado’s residential real estate prices as of April 2020, particularly in the Denver area, have only been minimally affected by the Coronavirus but I expect this to change long term as the Coronavirus continues to leave a financially catastrophic imprint.)