People file bankruptcy for a plethora of reasons, however, one of the top reasons people file for bankruptcy is due to a drastic change in their employment or lack thereof. Being unemployed can make paying your debts quite difficult, but does it make filing for bankruptcy more difficult? The answer to that question is a bit tricky and depends on the chapter of bankruptcy you intend to file. It is important to note that bankruptcy laws do not explicitly state that you must be employed to request bankruptcy protection, however, your lack of employment can affect your bankruptcy in a number of ways. We will explore your options and the hurdles associated with each type of bankruptcy filing.
Filing For Chapter 7
Chapter 7 bankruptcy discharges your debts by liquidating your non-exempt assets and paying off certain creditors while discharging other general unsecured debts in full. Over the years bankruptcy laws associated with filing for Chapter 7 have become stricter. One of the updated bankruptcy laws requires debtors to meet the requirements of a means test. First, a debtors’ income must be below the median income limit for their state; and second they must prove how much discretionary income they have to repay current creditors.
The plus side of filing for Chapter 7 bankruptcy while on unemployment is that your income probably is below the median income level for your state. Thus qualifying under the means test should be relatively easy. The down side of filing for Chapter 7 bankruptcy is your bankruptcy trustee will be allowed to take possession of any of your non-exempt assets, and choose how to liquidate them and pay your various debts. While certain assets will be exempt from liquidation the trustee will have access to the majority of your non-exempt assets.
Filing for Chapter 13
Chapter 13 bankruptcy is essentially a debt repayment plan that also provides the debtor with certain protections under the law. In Chapter 13 the debtor will typically be allowed to keep their assets and the trustee will work to create a repayment plan that can span three to five years.
Some people refer to Chapter 13 bankruptcy as the “wage earners bankruptcy”. Taking that common name into account you can understand that filing for Chapter 13 while unemployed could pose some difficulties. It is true there is no law that states you have to be employed to file bankruptcy but you are required to prove your ability to repay your debts within the agreed upon time-frame. If you have verifiable income available through unemployment benefits, social security benefits, retirement accounts, third-party family contributions, or other means you can still qualify to file for Chapter 13 bankruptcy.
So while you are not prohibited from filing either a Chapter 7 or Chapter 13 bankruptcy there are positives and negatives of each. While Chapter 7 bankruptcy will be easy to qualify for especially if the Debtor is unemployed, you risk the possibility of losing valuable non-exempt assets. With Chapter 13 bankruptcy you will have to prove you are able to afford a Chapter 13 monthly plan payment, but you will not lose any of your assets and will have enough discretionary monthly income to be able to repay some your debts. It is advisable to work with a qualified bankruptcy attorney to review your options and determine which type of bankruptcy is best for your current situation.