Here is what you need to know if you’re considering filing for bankruptcy because of coronavirus

For most Americans, it’s unusual to get a work phone call outside of normal business hours, let alone at midnight on a Saturday.

Six months ago, George Tadross would have agreed. But over the past few weeks, the Philadelphia-based bankruptcy attorney has been fielding calls at all hours, including late nights on weekends.

“The volume of calls is through the roof, and the tone and tenor is outright panic,” Tadross tells CNBC Make It. “People are freaking out.”

The panic is due, in part, to the fact that over the last month, nearly 22 million Americans have filed unemployment claims as cities and states around the country continue to order Americans to shelter in place in an attempt to mitigate the public health fallout from the coronavirus.

The number of Americans out of work could continue to grow exponentially. Economists with the St. Louis Federal Reserve estimated that the total number of Americans without a job could hit 47 million, or about a 32% unemployment rate, according to research released in late March.

Without work, many Americans worry about their ability to pay rent and other bills, as well as buy essentials such as groceries. About 58% of Americans say they’ve already lost income because of coronavirus, according to TransUnion’s online poll of over 3,000 U.S. adults. Of those, nearly seven out of 10 are worried about paying their bills and making good on loans.

But even if you are facing a shortfall, declaring bankruptcy to wipe out your debts may not be the answer, Tadross says. “A lot of people call me, and they want to jump right into bankruptcy. I tell them, ‘Look, don’t just jump right into that — give it some time,’” he says.

Here’s what financial experts say you should understand about the process, and the steps you should take before filing for bankruptcy.

Understand your options 

Whenever someone is facing a situation where their debt is spiraling out of control, Tadross says there are basically three options:

  • Pay the minimum on all your bills, stay current and tough it out as long as you can and hopefully your work picks up
  • Negotiate a settlement of some kind with your lenders
  • File for bankruptcy

Usually it doesn’t make sense to jump right into bankruptcy, Tadross says. Instead, Americans should focus on working with their bank and loan servicers to get some immediate help to lower or put off their payments. Many times, you can get back on your feet without filing for bankruptcy.

“Bankruptcy should be the very last resort, but especially now during the Covid-19 crisis,” Jack Gillis, executive director of the Consumer Federation of America, tells CNBC Make It.

Call your lenders first

Banks, lawmakers and regulators are rolling out a number of assistance programs. Consumers should take full advantage while they can.

The $2 trillion Congressional relief package, for example, not only blocks lenders from starting foreclosure proceedings on federally backed loans, it also gives homeowners experiencing financial hardships the option to request up to 180 days of forbearance on their mortgage.

Meanwhile, many of the biggest banks and credit unions have set up hardship programs, offering to defer credit card, auto loan and student debt payments until borrowers can get back on their feet.

If you’re being impacted, call your lender and tell them you need some assistance — and do so before you start to incur late fees.

“The key is to be proactive,” Gillis says. “Many companies are arranging special payment plans, forgiving late fees and suspending mortgage and rent payments — however you need to ask for these forbearances,” he adds, saying that consumers should keep a careful record of the conversation they had with customer service, including the rep’s name and details of the offer’s terms.

If you have a private loan, your level of assistance will vary, and you may not get the full 180 days, but take whatever forbearance you’re offered to give yourself some breathing room.

“We don’t know what it’s going to be like — maybe it’s two more weeks, maybe it goes on for two more months. And even then, the temporary relief may not be enough. But at least it’s a first step,” Tadross says.

Once the relief program ends, you may need to take additional actions

Forbearance and deferment programs will only last so long, and then you’ll need to pay your bills. And some lenders may even require you to pay all your missed payments at once. If you’re still struggling at that point, it may be time to ask your lender for some longer-term relief such as lowering the interest rates or monthly payment amount on your mortgage, auto loans or credit cards.

Underwater on your mortgage? You can apply for a loan modification that will rework the terms of your mortgage. Typically, if approved, you can reduce your monthly payment to a more affordable amount. This step requires you to file paperwork with your loan servicer.

While you can self-submit the application, Tadross says it may be better to work with an expert who specializes in this. If you do hire an attorney, expect to pay a flat rate of about $2,500 to have the paperwork compiled and processed. You can also reach out to a HUD-approved housing counselor, who will work with you for free to compile the necessary paperwork for the application.

When it comes to credit card debt, Tadross says the best thing to do is negotiate a debt management plan or a settlement, where you work with a non-profit debt counselor to consolidate all your outstanding debt into a single monthly payment that you pay off over the course of three years. Usually your counselor will negotiate a lower interest rate for you while you’re working to pay off your balances.

If it’s becoming increasingly clear you probably won’t repay your credit card debt in full, you may want to consider a settlement. Some credit card companies may agree to wipe out your total overdue balance if you can cobble together a lump sum payment that covers a portion of your debt. As an example, a credit card company may accept a $2,000 payment on a $5,000 balance.

That said, if you’re up-to-date with all your payments, no creditor will settle with you, Tadross says. “The only way to settle a credit card debt is to fall behind. I’m not saying that people should be doing it intentionally, but I also know that it’s just going to happen on its own,” he says, adding that when you’re several months behind, you’re more likely to be able to negotiate down what’s owed, but the timeline will vary by creditor.

Of course, not paying your credit cards will impact your credit score, as will settling. A missed payment negatively affects your score, and the higher your credit before you skip a bill, the more impact you will see, John Ulzheimer, an expert on credit scores and credit scoring, tells CNBC Make It.

Bankruptcy is not the end of your financial life

If you can no longer afford to pay your bills and you haven’t been able to negotiate better terms with your lender, then it may be time to consider bankruptcy. Don’t beat yourself up over it too much, Rao says.

Filing for bankruptcy is often seen as this admission that “I’m a failure,” but that’s not usually the case, he says. And while it’s a step most people don’t want to take, bankruptcy can provide a lot of relief if done right.

“It really does provide that fresh start,” Tadross says, adding that once your Chapter 7 bankruptcy is approved, or you receive a discharge in your Chapter 13 case, you’re completely debt-free.

Chapter 13 bankruptcies can stay on your credit report for three years, while Chapter 7 cases disappear after 10 years. But that won’t prevent you from getting approved for credit.

Quite the opposite, Tadross says, adding he usually advises clients that they will likely receive dozen pre-approved credit card offers within a week of completing their bankruptcy. Why? Because creditors know you’re debt-free and that you’re not going to be able to file for another bankruptcy for several years.

Debt can feel like an albatross around your neck, Tadross says, but you shouldn’t feel humiliated that you’re taking steps to rectify it through bankruptcy. “You’re just making arrangements to catch up on what you owe — it’s not the end of the world,” he adds.