Can I File for Bankruptcy If I Am Unemployed?

Unemployment is not a bar to filing for Chapter 7 or Chapter 13 bankruptcy, but there are some things you may want to consider.

By , Attorney

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:

  • qualifying for Chapter 7 before and after getting a new job
  • filing for Chapter 13 using unemployment benefits and other income types, and
  • issues retired, disabled, and self-employed people should have evaluated.

If you aren't familiar with bankruptcy, learning how to choose between Chapters 7 and 13 is an excellent place to start.

Can I File for Bankruptcy If I'm Receiving Unemployment Benefits?

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.

Which Bankruptcy Chapter Should I File While Unemployed?

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.

Qualifying for Chapter 7 Bankruptcy When Unemployed

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:

  • Your average monthly gross income for the six months before filing isn't more than your state's median income for a similar household. (Multiply your six-month total by two before comparing it to the yearly amounts listed on the U.S. Trustee Program website.)
  • After deducting allowed expenses on the second part of the means test, you don't have enough remaining to repay creditors a reasonable amount through a Chapter 13 repayment plan.

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.

Qualifying for Chapter 7 After Getting a New Job

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.

Can Unemployed People File for Chapter 13 Bankruptcy?

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.

Why You Might Want to File for Chapter 13

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.

Qualifying for Chapter 13 Bankruptcy When Unemployed

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.

Unemployed People Might Qualify for a Chapter 13 "Zero Percent" Plan

The Chapter 13 plan requirements are relaxed for low-income filers who qualify for Chapter 7, which allows these debtors to do the following:

  • pay creditors for three years instead of five
  • use actual expenses when determining a Chapter 13 payment amount, and
  • in some cases, pay nothing toward credit card bills, medical debt, personal loans, and other unsecured debt in what's known as a "zero percent" plan.

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.

Qualifying for Chapter 13 When Retired, Disabled, or Self-Employed

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.

Meet With a Bankruptcy Lawyer

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.

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