Many people qualify for bankruptcy when unemployed. Typically, people without jobs file for Chapter 7 bankruptcy because the steady income required by Chapter 13 bankruptcy makes filing more challenging when unemployed.
In this article, you'll learn about bankruptcy options for people who aren't working, including:
If you aren't familiar with bankruptcy, learning how to choose between Chapters 7 and 13 is an excellent place to start.
Yes, you can file for bankruptcy while between jobs. For many, it's the ideal time to erase debt and get a fresh financial start.
Ultimately, the bankruptcy chapter you choose will depend on your financial circumstances. Even so, most people prefer Chapter 7 for several reasons. It's quick, filers don't repay creditors, and many can keep all or most of their property using bankruptcy exemptions.
By contrast, in Chapter 13 you'll need enough income to cover monthly living expenses plus pay some amount to creditors over three to five years, so it's rarely an option for the unemployed. But that's not always the case. Keep reading to learn more about qualifying for Chapters 7 and 13.
Most unemployed people qualify for Chapter 7 relatively soon after leaving a job. You can find out if you're eligible by taking the Chapter 7 means test.
The test will require you to add together all income received during the six months before filing, including unemployment benefits. You'll pass if one of the following situations is true:
Wait a few months if you don't pass using either method. If you remain unemployed, your average monthly gross income will decrease with time.
If you're looking for a new job, the window of opportunity to wipe out debt might be small. If your income increases but your expenses don't, you could have disposable income available to pay creditors. You'd have to use Chapter 13 even if you passed the Chapter 7 means test.
It's possible, but unemployed people rarely use Chapter 13 bankruptcy. Still, it might be worth exploring because Chapter 13 bankruptcy offers benefits that aren't available in Chapter 7.
The Chapter 13 payment plan lets filers erase debts and save property. Here are a few things possible in Chapter 13 but not Chapter 7.
Learn more about when filing for Chapter 13 might be a good option.
Many unemployed people struggle to meet necessary expenses, even when receiving unemployment benefits. Having income available to pay creditors matters because in Chapter 13 bankruptcy because you must propose a three- to five-year repayment plan to pay back a portion of your debts.
The Chapter 13 plan requirements are relaxed for low-income filers who qualify for Chapter 7, which allows these debtors to do the following:
Essentially, people who qualify for Chapter 7 yet choose to file for Chapter 13 can often use their money toward the things that mean the most to them. For example, these accommodations might be enough to help you save a house or car, or perhaps pay off a tax debt or support obligation that can't be erased in bankruptcy.
Find out what happens if you can't pay your Chapter 13 payment.
If you're receiving Social Security or disability benefits, have a pension or retirement income, or rental property income, you might technically be "unemployed." However, if you're actually retired or self-employed, bankruptcy might not be a good choice.
The distinction matters in bankruptcy because although it's possible to use these income types in Chapter 13, each category raises issues best addressed by a bankruptcy lawyer.
For instance, retired people often fall into one of two categories. Either they're "judgment-proof" and don't need to file for bankruptcy or own too much property for bankruptcy to make sense. Similarly, many rental property owners would pay exorbitant monthly Chapter 13 payments. Why? Bankruptcy exemptions don't protect rental property equity in almost every state.
A bankruptcy lawyer who sees these types of income will evaluate your case closely because Chapter 13 isn't feasible or intended for these groups in many cases.
The primary job of a bankruptcy attorney is to secure your debt discharge while protecting you from unnecessary loss. If you're considering filing for Chapter 13, or if you own valuable property and plan to file for Chapter 7, consider consulting with a bankruptcy lawyer.
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.