You don’t need to be employed to file for bankruptcy. In fact, the lower your income, the more likely that you’ll qualify for a Chapter 7 filing.
Which Bankruptcy Chapter Is Right for You?
An important part of deciding your course of action is understanding the benefits of the two types of bankruptcy available to most individuals.
Chapter 7 bankruptcy. In this type, a debtor can keep a certain amount of property (“exempt property”), such as clothing, furnishings, and an inexpensive car. Nonexempt property gets sold and the proceeds get divided among the creditors. In return, a debtor’s qualifying debts get wiped out (discharged) in the bankruptcy case.
Chapter 13 bankruptcy. A debtor can keep nonexempt property and make payments to creditors for three to five years. At the end of the Chapter 13 payment plan, a debtor will receive a discharge of the remaining balance of qualifying debt.
Most people who want a quick discharge file under Chapter 7 bankruptcy. Chapter 13 bankruptcy works well for high-income earners and those who’d like to catch up on a mortgage or car payment.
If your income comes solely from unemployment benefits, you’ll likely pass the test that determines whether you qualify for a Chapter 7 bankruptcy, or whether you’re limited to a Chapter 13 case.
The means test examines your income for the past six months to see whether your disposable income is high enough to make monthly creditor payments for three to five years. If it isn’t, you’ll qualify for Chapter7 bankruptcy (like most unemployed people). If you can pay your creditors something, you’ll have to file for Chapter 13 bankruptcy.
When You Have a Good Job Prospect
If your previous job was a high-paying one and a new job would also pay well, the court and the bankruptcy trustee could take these factors into account when deciding whether you should stay in Chapter 7 bankruptcy, or file for Chapter 13 instead. Some factors you should consider before filing:
- Do you have a new job offer on the table?
- Do you expect your period of unemployment to be a short one (and is this a realistic expectation in your field)?
- Can you return to work, or are there factors that will keep you out of the workforce (such as personal disability or family obligations)?
- How high is your debt load compared to the amount of money you make?
Also, keep in mind that you’ll have to report the amount that you’ll make going forward. This portion of the analysis can trip some people up because even though they pass the means test, they will have sufficient disposable income (more money than needed to pay expenses) to pay creditors, and might be required to file a Chapter 13 case.
Chapter 13 Bankruptcy Doesn’t Work Well When Unemployed
Most unemployed people don’t find that Chapter 13 bankruptcy is available to them because you must prove to the court that you have regular income to pay into a repayment plan. In this situation, you might need to wait until you are employed again.
Choosing the most suitable bankruptcy type is an important and complicated decision. Consulting an attorney for advice about the best chapter for you is always a good bet.
Questions for Your Attorney
- Do I pass the means test?
- When should I file my bankruptcy case?
- What will happen if I get a new job after filing for bankruptcy?