Facing unemployment is always distressing. But during these uncertain times, people are especially worried. Most Americans are overwhelmed by debt even when the economy is doing well. When faced with unemployment, many wonder what options they may have to protect themselves financially.
Bankruptcy can provide that protection and relief from debt. Yet many people are hesitant to pursue bankruptcy due to confusion over the rules surrounding employment.
Will being unemployed hurt your bankruptcy case?
Employment Status Won’t Impact Bankruptcy
Bankruptcy law involves income but does not deal directly with employment. Neither federal nor state laws establish any limit on whether those filing must be employed – or what kind of employment is allowable when applying for bankruptcy.
When an individual files for bankruptcy, they must provide income documentation for the 180 days before filing. The documentation includes salary and wage information, but also income from other sources such as:
The court will utilize the documentation to establish what type of bankruptcy is appropriate.
Chapter 7 Bankruptcy and Unemployment
In Chapter 7 bankruptcy, the court liquidates assets, uses the money to pay off as much debt as possible, and eliminates all remaining qualifying debt.
To file for Chapter 7, individuals must pass a Means Test. The means test is based on income over the last six months, which cannot exceed the stated limit.
Based upon the means test, unemployment may help individuals when filing for bankruptcy. Applicants are likely to have lower income if they don’t have a job, which can help them stay below the limit.
However, not everyone is in a similar situation.
For instance, if you were in a higher income bracket and only lost your job in the last few months – your previous six months income may still be over the limit. In that case, you may need to wait for a few months before filing.
Conversely, if you have been unemployed for many months already, it may be beneficial to file right away. Many people hesitate to file, putting the process off hoping that their financial situation will right itself. Unfortunately, research shows that people in severe financial stress add between $4,000 and $7,000 of new debt every month they delay. If any of the newly added debt is non-dischargeable, you have more to pay back.
Chapter 13 Bankruptcy and Unemployment
With a Chapter 13 filing, applicants retain the majority of their assets. They work with the court to create a 3-5 year repayment plan that permits them to pay off their debts over time. However, individuals can’t agree to such a plan if they don’t have a steady paycheck or documented income that is likely to continue.
An unemployed individual can rarely prove enough consistent income to fulfill a chapter 13 bankruptcy repayment plan successfully. Therefore, unemployment can make it challenging to qualify for Chapter 13 bankruptcy.
There is an exception – if an individual can prove enough reliable income despite being unemployed, the court may deem them eligible. Income may be derived from Social Security, retirement or pension funds, investments, or rental properties.
Determining What is Best For You
If you are experiencing financial stress and are wondering if bankruptcy is right for you, call a professional! The bankruptcy attorneys at the offices of Richard V. Ellis have the expertise you need to understand your situation and take the necessary steps to fix your financial situation.