Filing Bankruptcy While Unemployed

The last few years have been economically challenging to say the least.  Jobs were lost, stimulus payments have stopped, and savings have dwindled leaving many individuals to rely on credit cards to make ends meet.  After a period of unemployment, many come to realize that a bankruptcy may be needed to help deal with mounting debt.  Is it better filing bankruptcy while unemployed?

The short answer is yes, especially if the debtor desires to wipe out their debt without repayment as is the case in chapter 7 bankruptcy.  To qualify for a chapter 7 bankruptcy, a debtor’s income and expenses need to reflect an inability to substantially fund creditors in a chapter 13 repayment plan.  Otherwise, under the Bankruptcy Code, it would be an abuse of the process to file a chapter 7 due to an ability of the debtor to substantially pay creditors in a chapter 13.

To be clear about chapter 7 bankruptcy, the lower the income the better, and the higher the allowable living expenses the better, too.

The Difference Between Chapter 7 and Chapter 13 Bankruptcy

The two most common forms of bankruptcy filings are chapter 7 and chapter 13.  As mentioned above, in a chapter 7 a debtor gets most types of debts wiped out without a repayment plan and the entire process is completed in about three months.  Although chapter 7 bankruptcy could require the liquidation of assets to eliminate debt, with proper exemption planning performed by an experienced bankruptcy attorney, in only a small percentage of chapter 7 cases will a debtor have an asset liquidated.

Chapter 13 bankruptcy, however, involves the reorganization of debts through a re-payment plan where the debtor makes a single monthly payment to the chapter 13 trustee who then distributes those funds to the creditors per the terms of the plan.  While a chapter 13 is a wonderful tool to stop a foreclosure by providing a debtor up to five years to repay past due mortgage arrears, unless that is the case, usually a debtor would be far better off filing a chapter 7.

Since both bankruptcy filings are different, both have different qualifications.  Eligibility will depend on:

• How long a person has been unemployed
• The amount of money earned in previous jobs
• Whether the debtor will start a new job soon
• Whether there are other sources of income (including income of non-separated spouse)

Unemployment Calculations in Bankruptcy

The Bankruptcy Code considers unemployment benefits as income in both the forward-looking and backwards-looking income tests.   The analysis of the backwards-looking income test only includes income received within the 6 calendar months preceding the month the bankruptcy is filed.

If a debtor is above median income based on the debtor’s household size, the Bankruptcy Code then requires that the debtor pass the Means Test to determine whether and to what extent the debtor’s income enables the debtor to substantially repay creditors in a chapter 13.  In some cases, unemployment income may disqualify the debtor for a chapter 7, but usually the opposite is true.

Some sources of income are not counted towards the backward-looking income test, including Social Security and V.A. disability payments.  It is highly recommended to consult an experienced bankruptcy attorney to determine the best path forward when filing for bankruptcy.

Chapter 13 Bankruptcy Considerations

While a person does not need to have a job to file a Chapter 13 bankruptcy, unemployment compensation may affect the outcome as to whether a proposed plan is confirmable by the Bankruptcy Court.  Under Chapter 13, the debtor will typically have a three-to-five-year repayment plan proposed to repay creditors.

In some cases, Chapter 13 filings may be challenging for the unemployed because regular income is needed to show that the debtor’s plan is feasible.  In other words, the debtor’s projected future income, less expected reasonable and necessary living expenses, mathematically must show enough income would remain each month to fund the amount of the proposed Chapter 13 plan payment.  As unemployment benefits are of a limited duration, the Chapter 13 reorganization plan may be denied.

Consulting an Experienced Bankruptcy Attorney

There are many different options to consider when filing for bankruptcy.  The experienced bankruptcy team at RJS LAW will help you navigate the intricacies of the bankruptcy process and help you obtain a fresh start unburdened by most types of debt.  To schedule a free confidential, no-obligation consultation with the bankruptcy team at RJS LAW call us today at (619)-595-1655 to discuss your options filing bankruptcy while unemployed.