If you lost your job, you may be wondering if you can file for bankruptcy while unemployed. Read on to find out if this is an option.
Americans are drowning in debt. Officially, households nationwide are carrying almost $700 billion in delinquent liabilities. Behind the scenes, many are further weighed down with unsecured debts that have not yet hit the formal tally.
Bankruptcy can provide relief. Yet many Americans hesitate to act on it due to confusion and concerns over the state of their employment.
“Can I file for bankruptcy if I am unemployed?” they wonder. “Will lack of employment hurt my case?” If you are facing the same questions, here are the facts you need to move forward.
Employment Itself Does Not Impact Bankruptcy
Bankruptcy law does not address employment directly. Neither federal nor state laws place any type of limit on whether applicants must be employed or what type of employment applicants can hold when applying for bankruptcy. Instead, bankruptcy laws revolve around income.
When you file for bankruptcy, you must provide documentation of your income for the six months prior to filing. This includes wages and salary information, but also income from other sources such as:
- Investments
- Alimony or child support
- Retirement and pension funds
- Structured settlements
The court will use this information to determine what type of bankruptcy you qualify for.
Unemployment and Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, filers hand over most of their assets to the court. The court:
- Liquidates those assets
- Uses the money to pay off as much of the filer’s debt as possible
- Eliminates all remaining qualifying debt
This leaves filers with only their non-dischargeable debts and a clean financial slate. To qualify for Chapter 7, filers must pass a Means Test. Their income over the previous six months cannot exceed the income limit for filing for bankruptcy.
In this respect, being unemployed can help individuals filing for bankruptcy. With no job, applicants are likely to have very little income. This can help them meet the eligibility cutoff.
Timing Matters
Not every situation is the same, however, and timing matters.
For example, if you were employed in a high-income field and only recently lost your job, your income for the last six months might still exceed your state’s limit. Thus, to qualify for Chapter 7 while unemployed, you might have to wait a few months before filing to qualify for Chapter 7.
On the other hand, if you have been without work for some time already, you may benefit from filing sooner rather than later. Many applicants delay filing, only to rack up new debts of between $4,000 and $7,200 each month. While some of this debt may be discharged, some may non-dischargeable.
The more non-dischargeable debt you accrue before filing, the more you have left to pay off post-bankruptcy.
Unemployment and Chapter 13 Bankruptcy
Chapter 13 is very different from Chapter 7 in both its structure and its results. Under Chapter 13, applicants keep most of their assets. They work with the court to develop a multi-year repayment plan that allows them to pay down their debts over time.
For such a plan to work, however, applicants must have a steady income. They must be able to document that income and demonstrate that they are likely to maintain it, and thus their ability to pay, over the life of the repayment plan.
Few unemployed persons can demonstrate enough consistent income to keep up with the chapter 13 bankruptcy repayment plan. As such, unemployment can make it difficult to qualify for Chapter 13 bankruptcy. With that said, it is not impossible to qualify for Chapter 13 while unemployed.
If you can demonstrate that you have enough reliable income despite having no job, the court may still find you eligible. For example, you may have modest debts and income from:
- Social Security
- Retirement or pension funds
- Rental properties or other investments
In such a case, Chapter 13 might be an option for you.
The Benefits of Consulting an Attorney Before You File for Bankruptcy
It is always wise to consult a bankruptcy lawyer before filing for bankruptcy. Doing so is even more important if you are unemployed. There are several reasons for this.
First, a bankruptcy attorney can help you determine what type of bankruptcy you are eligible to file for. They can also advise you on which type of bankruptcy best suits your needs.
Filing for the wrong type of bankruptcy can be costly. Not only will you pay more in filing and court fees if you need to change your application but, in some cases, you can accidentally shut yourself out of being able to re-file for months or years if you handle your filing wrong the first time. An attorney can help you avoid these mistakes.
Second, a lawyer can assist you in deciding when the best time to file is based on your unique situation. Filers are often surprised to discover that even a difference of just a few weeks can have a significant impact on the overall outcomes of their case. Since bankruptcy law is so complex, however, it is challenging to evaluate such differences on your own.
An attorney can show you how to file for bankruptcy and how to navigate the process to achieve the best results.
Third, working with a bankruptcy lawyer can ensure that you have appropriate and realistic expectations. Many would-be filers have received incorrect information about bankruptcy from friends, family, and other sources. This can lead them to misunderstand:
- Their full range of options
- How much bankruptcy costs
- What debts and how much debt they can discharge via bankruptcy
- The full impacts of a bankruptcy on their credit and financial options
- The interplay between bankruptcy and divorce or other major life changes
Without the correct information on these and related subjects, filers are at a disadvantage. They can miss out on great opportunities or make poor choices simply because they didn’t know all the details. Consulting with an attorney provides you with the information and support you need to make good choices every time.
Schedule a Consultation
Before you file for bankruptcy, it’s important to talk to an expert. Call (402) 415-2525 to schedule an appointment and let our experienced attorneys help you make informed and empowered choices about your financial future.
