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Can a Bankruptcy Court Take Payments Out of Your Unemployment Checks?

One of the questions asked by many who may be facing bankruptcy for the first time is, “Can a bankruptcy court take payments out of your unemployment checks?”

Chapter 7 Bankruptcy and Chapter 13 Bankruptcy are the most common types of bankruptcies filed.

Chapter 7 Bankruptcy, commonly called liquidation of your assets, is normally the simplest and quickest form of bankruptcy.

Chapter 13 Bankruptcy, commonly called a wage earner’s plan, enables individuals with regular income to develop a plan to repay all or part of their debts over three or five years.

In Chapter 7 Bankruptcy cases, unemployment compensation is federally exempt from bankruptcy. Most state laws also exempt unemployment compensation. So to answer the question, under most conditions, the bankruptcy court will not take unemployment compensation from you to pay-off creditors.

In addition, Chapter 13 Bankruptcy cannot be filed for a person who is on unemployment. Chapter 13 Bankruptcy can only be filed by a person with regular income. Since unemployment benefits are considered emergency and temporary funds, you will not be allowed to build a plan on that type of income.

Other logical questions you might ask yourself when it comes to unemployment compensation are, “What if I lose a job after I have filed for bankruptcy protection? Will they still take out payments on my unemployment checks?”

If you lose your job after filing Chapter 7 Bankruptcy, very little changes. You still have to report the change in income, but unemployment compensation is still exempted from bankruptcy in most circumstances.

In Chapter 13 Bankruptcy you have to report the change in income to the trustee, and this could change the bankruptcy, depending on your particular situation. If your new unemployment income is not enough to make the plan payments, there is a possibility the trustee would dismiss the case.

There are other forms of relief such as a discharge for hardship. It allows the filing debtor to discharge their debts without having to convert to Chapter 7 Bankruptcy. The Chapter 13 Bankruptcy discharge for hardship is available under the following conditions:

  • The debtor’s failure to complete plan payments due to circumstances beyond the debtor’s control and through no fault of the debtor;
  • Creditors have received at least as much as they would have received under Chapter 7 liquidation; and
  • Modification of the plan is not possible. Injury or illness that precludes employment sufficient to fund even a modified plan may serve as the basis for a hardship discharge.

The hardship discharge is more limited than a regular discharge in bankruptcy and does not apply to any debts that cannot be discharged in Chapter 7 Bankruptcy.

Some believe there is an advantage for this type of discharge. Once a debtor receives the discharge, they are allowed to immediately file for Chapter 13 Bankruptcy again when their financial situation allows. This characteristic of this form of relief allows a debtor to revisit the Chapter 13 Bankruptcy option when they are better suited to complete the repayment plan.

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