Loss of Income/Unemployment Protection
Job loss is a common reason to file for bankruptcy. You do not need to be employed to file for Chapter 7 bankruptcy, although you do need to pass the means test. On the other hand, being unemployed or losing income can present a problem if you want to file for Chapter 13 bankruptcy, or if you have already filed for Chapter 13 bankruptcy, and you are in the midst of executing your debt repayment plan.
Filing for Chapter 7 Bankruptcy While Unemployed
Chapter 7 is designed to help low-income or unemployed debtors who do not have substantial assets. Under Chapter 7, your creditors will only receive repayment if you have non-exempt assets that your bankruptcy trustee can liquidate in order to pay them. Although the trustee’s job is to make sure creditors are repaid to the extent possible, people who file for Chapter 7 usually do not have non-exempt assets, and creditors are not repaid.
In order to file under Chapter 7, you must pass the means test. The first step of the means test is to look at whether your income is below the median, and if it is you pass the means test and do not have to take further steps. In most states, even if you receive unemployment benefits, they will not put you over the median income for your state.
Bankruptcy courts in different jurisdictions vary on whether your unemployment compensation counts as “income” for purposes of the means test, based on whether or not they consider it a benefit arising out of the Social Security Act. Some courts do not consider these benefits to be Social Security benefits, and in those courts, your unemployment benefits must be included in the means test calculation.
If your unemployment benefits did put you over the median, and they count as income in your jurisdiction, you will need to look at the disposable income that is left after you subtract necessary expenses to the degree allowed in your state. It is rare for unemployment benefits to be so substantial that you would have significant disposable income. In most cases, unemployed people will pass the means test.
Becoming Unemployed When Filing for Chapter 13 Bankruptcy
Chapter 13 requires you to repay debts over a period of 3-5 years, while offering you various tools such as lien stripping or cram-downs of certain loans. It is very difficult to stick to a repayment plan if you are unemployed, even if you are collecting unemployment benefits. In most cases, you should not file for Chapter 13 bankruptcy if you become unemployed. However, your plan may be approved if you can show you have sufficient income from another source, such as rental income or sale of a property, to fund the debt repayment plan.
If you become unemployed after filing for Chapter 13 bankruptcy, you may need to stop making payments. In that case, the court will likely dismiss your case. You will not receive a discharge because you did not complete your plan. Moreover, you will not be able to strip junior liens or use a cram down. However, you may qualify to file Chapter 7 bankruptcy at that point, which takes much less time to complete than Chapter 13. If you do get a job again, and your case has not already been dismissed, you may be able to get back on track with payments. The trustee or court will likely require you to provide documentation that you can afford the plan after all.