Recently on our bankruptcy forum a user asked, “I have decided to file for bankruptcy. I have been unemployed for more than six months. In fact, my unemployment is the primary reason I need to file. I am wondering, however, whether being unemployed makes it easier or more difficult to file bankruptcy. What do I need to know before I file?”
Individuals file for bankruptcy protection for a variety of reasons: high medical bills, out of control credit card debts, divorce, and even the death of a loved one. Job loss, however, is one of the most common cited reasons for filing bankruptcy.
Although the bankruptcy court and bankruptcy laws do not require you to be employed to file for bankruptcy protection, unemployment can impact your bankruptcy is a variety of ways. Below we will discuss the issues that you need to consider prior to filing for bankruptcy protection.
Filing Chapter 7 bankruptcy and unemployment
Bankruptcy laws were updated in 2005 making it more difficult for many debtors to file for Chapter 7 bankruptcy and to have some of their unsecured debts discharged. One of the main changes in bankruptcy laws was to require debtors to meet certain income limits.
First, debtors have to complete an income test to determine whether their income is below their state’s median income limits. If it is, they then have to complete additional means testing to determine how much discretionary income they have to repay their creditors.
The good news for you is that if you are unemployed it’s likely that your income is limited, allowing you to file Chapter 7 bankruptcy.
The bad news, however, is that filing Chapter 7 bankruptcy allows a court-appointed trustee to take your assets, which are not exempt under federal bankruptcy laws, and liquidate them to repay your creditors.
If you do not want your assets liquidated, however, you might be able to file Chapter 13 bankruptcy. Protecting your assets may be easier with Chapter 13 bankruptcy, but filing Chapter 13 without a consistent flow of income will be much more difficult.
Filing Chapter 13 bankruptcy and unemployment
Chapter 13 bankruptcy allows debtors to create a 3 or 5 year debt repayment plan, generally keeping most of their assets, and repay their creditors a percentage of what is owed.
Chapter 13 bankruptcy is often referred to as the wage earner’s bankruptcy, which means the bankruptcy court expects that if you file for Chapter 13 bankruptcy that you have some source of income to meet the demands of the 3 or 5 year repayment plan.
Does this mean that you cannot file for Chapter 13 bankruptcy if you are unemployed? No, but you will have to supply evidence that you can make your plan payments. Other sources of income which may allow you to do that can include unemployment benefits, Social Security disability or retirement benefits, or income from other sources such as a retirement plan or a rental house.
Filing Chapter 7 bankruptcy while unemployed should not be a problem. Filing Chapter 13 bankruptcy without any source of income, however, will not be possible.
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