Can I File for Bankruptcy If I Am Unemployed?

You don't have to be employed to file for bankruptcy. But being unemployed can affect the success of your bankruptcy if you file for Chapter 13.

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There is no requirement that you have to be employed in order to file for bankruptcy.  In fact, job loss is one of the most common reasons people file for bankruptcy.  However, being unemployed can still affect the outcome and success of your bankruptcy filing.  This depends on whether you are filing a Chapter 7 or Chapter 13 bankruptcy.  Read on to learn more about how being unemployed can affect your bankruptcy.

How Does Being Unemployed Affect Your Bankruptcy?

The answer depends on if you are filing a Chapter 7 or Chapter 13 bankruptcy.  Being unemployed usually makes the bankruptcy process easier, especially in a Chapter 7.  However, if you are filing a Chapter 13, it may create problems in getting your case approved if you cannot afford your repayment plan.

Chapter 7 Bankruptcy

Chapter 7 is designed to wipe out unsecured debts such as credit cards and medical bills for low income debtors with little or no assets.  In most cases, creditors don’t receive anything because debtors don’t have any non-exempt property that can be taken and sold. (To learn more, see our Chapter 7 Bankruptcy area.)

Since debts are wiped out without paying anything to creditors in majority of Chapter 7 cases, debtors must pass a means test to qualify for a Chapter 7.  The means test compares your household income against your state’s median income for a similar household.

If your income is below the median, you qualify automatically.  If you are above median, you must show that you have no disposable income because you have high allowable expenses.  Most unemployed debtors have no income or they collect unemployment benefits which are normally well below Chapter 7 income limits.  So being unemployed usually makes it easier for you to qualify for a Chapter 7 bankruptcy.

(To learn more about the means test, see Chapter 7 Eligibility & The Means Test.)

Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy, debtors pay back all or a portion of their debts through a three to five year repayment plan. Chapter 13 also allows debtors to catch up on mortgage arrears, get rid of their second mortgage, cram down car loans, or pay back nondischargeable debts such as domestic support or certain taxes. These benefits are not available through a Chapter 7.(To learn more, see our Chapter 13 Bankruptcy area.)

As a result, Chapter 13 is used not only by debtors who don't qualify for a Chapter 7 but also by those who choose to file a Chapter 13 instead of Chapter 7 to take advantage of these additional benefits.  Since you are required to make monthly plan payments to the bankruptcy trustee, Chapter 13 is generally for debtors with regular income.

However, if you are unemployed, you can still file for Chapter 13 bankruptcy.  Many unemployed debtors collect unemployment benefits, social security, or have other sources of income such as rental income which can be used to fund their plan.  If you can show that you have enough income coming in from sources other than employment to afford your plan, then your case will likely get approved by the court. 

If you have no income, the court will dismiss your case unless you can prove that you are able to afford your bankruptcy plan. If you find a job during bankruptcy, you will usually be required to notify the trustee or the court and provide further documentation.

by: , Attorney

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