Can I File for Bankruptcy If I Am Unemployed?

You can file for bankruptcy while unemployed if you meet Chapter 7 or 13 income qualification requirements. But not having a job or limited income will impact Chapter 7 and Chapter 13 filings differently. This article addresses common questions about filing for bankruptcy while unemployed, including whether it's possible to do the following:

• file for bankruptcy without money
• file for bankruptcy on unemployment
• qualify for Chapter 7 soon after a job loss, and
• use Chapter 13 bankruptcy while unemployed.

Most people learn that filing for Chapter 7 bankruptcy works well for unemployed and employed people with little to no money after paying monthly expenses.

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Can I File for Bankruptcy If I Have No Money?

Yes, bankruptcy is intended to help people who can't pay their debts, and if you don't have income or make much, you'll likely file for Chapter 7 rather than Chapter 13.

Chapter 7 bankruptcy helps people with low or no income (and sometimes even higher-income people) cancel qualifying debt in about four months. By contrast, Chapter 13 is for wage earners who can repay creditors through a three- to five-year repayment plan and requires an income source.

If you're worried about having no money for a bankruptcy attorney, read about options when you can't afford a bankruptcy lawyer.

Can I File for Bankruptcy on Unemployment?

Yes. Most people receiving unemployment benefits choose to file Chapter 7. Usually, they qualify no later than six months after the job loss. It's even possible to qualify for Chapter 13 while unemployed, although less likely.

Learn why some people must delay filing in the "Newly Unemployed Chapter 7 Filers Might Not Qualify Immediately" section. Potential Chapter 13 filers can skip ahead to "Filing for Chapter 13 Bankruptcy While Unemployed."

Why Do People With Low or No Income Choose Chapter 7?

Most people who qualify for Chapter 7 bankruptcy use it, whether employed or unemployed. It's quick, takes only four months to complete, and doesn't require creditor payment.

Chapter 13 requires filers to earn enough to repay creditors through a lengthy three- to five-year Chapter 13 plan, which eliminates most people with low or no income. Also, filing for Chapter 13 can be costly.

That's not to say it isn't possible to file for Chapter 13 when your only source of income is unemployment benefits, but it's not probable. If you're one of the rare unemployed people considering Chapter 13, skip to the "Can Unemployed People Use Chapter 13 Bankruptcy?" section toward the end of the article.

How Chapter 7 Can Help People With No Money

Chapter 7 bankruptcy wipes out qualifying unsecured debts, such as credit cards, past-due rent, utility balances, and medical bills. Filers can keep "exempt property" necessary to maintain a household and employment so they don't lose everything they own.

Unnecessary nonexempt property gets sold for the benefit of creditors. Still, it rarely happens because unemployed people often sell luxury goods for rent and other expenses before considering bankruptcy.

Will I Qualify for Chapter 7 When Unemployed?

It's likely. But not everyone qualifies for a Chapter 7 debt discharge, the order that wipes out debt. Only people whose earnings don't exceed income limits. You can determine whether you qualify by taking the Chapter 7 bankruptcy means test.

How Do I Pass the Chapter 7 Means Test?

The first part of the means test compares your gross household income to your state's median income. You'll pass if your income doesn't exceed the median amount for your family size.

The second part allows people whose income exceeds median limits to deduct expenses from their gross income. They'll pass if the calculations show they don't have enough income to fund a Chapter 13 repayment plan.

Here are the particulars.

• Comparing your total income to the state median income. You'll add together the gross income earned by all family members during the full six months immediately preceding your filing date. If the total amount is below the median, you'll qualify and won't need to proceed to step two. You'll go to the next step if it's above the median. You'll find the median incomes for your state on the U.S. Trustee Program website.
• Subtracting allowable expenses from your gross income. This step determines your disposable income by subtracting certain expenses from your gross income. For instance, you'll deduct the amount you actually spend on some things, such as income taxes, mandatory income deductions, and childcare. You'll be allowed to deduct a certain amount for other expenses, such as food, utilities, and housing costs. If, after completing the calculations, you don't have sufficient disposable income to make a meaningful monthly payment to your creditors, you'll pass the means test.

Find out about expenses that can help you pass the means test.

Newly Unemployed? You Might Not Qualify for Chapter 7 Right Away

Passing the means test can be challenging if you've recently lost a high-paying job—at least temporarily. Even if you aren't earning anything currently, you'll still have to report the amount you received during the prior six months on the means test. If the figure is high enough, you'll fail.

The solution? Wait a few months. If you remain unemployed, your six-month average income will drop quickly. However, remember that you'll also report any unemployment earnings you receive.

New Job? You Might Lose Chapter 7 Eligibility

Chapter 7 qualification depends on more than the means test. The bankruptcy court also considers the amount you have remaining after paying your monthly bills. So, if you land a new job with a hefty salary and your expenses are low, you could face a qualification problem even if you pass the means test.

If you're wondering how the court would find out, the Chapter 7 trustee assigned to your case would likely be the cause.

When reviewing your bankruptcy filings, the trustee will compare the monthly expenses reported on Schedule J: Your Expenses to the monthly income on Schedule I: Your Income. Also, the trustee will ask if your petition information is accurate at the 341 meeting of creditors, the one appearance all bankruptcy filers must make.

After reporting your new job, the trustee would instruct you to "amend" or change incorrect information on your bankruptcy forms. The bankruptcy trustee assigned to your matter will recommend that the court "convert" or switch your Chapter 7 to Chapter 13 if the amended information reveals you can repay creditors.

Can Unemployed People Use Chapter 13 Bankruptcy?

If you are filing a Chapter 13 and you're unemployed, you'll likely have difficulty getting a Chapter 13 "confirmed" or approved. Why? Chapter 13 debtors must be able to repay creditors over time, which takes income.

In a Chapter 13 bankruptcy, a debtor proposes a three- to five-year repayment plan to pay back all or a portion of debts—a benefit not available in Chapter 7 bankruptcy. For instance, a debtor can use the plan to catch up on mortgage arrears, get rid of a second mortgage, cram down car loans, or pay back nondischargeable debts you can't wipe out in bankruptcy such as domestic support or certain taxes through the repayment plan.

Learn about keeping a house in Chapter 13 bankruptcy.

Qualifying for Chapter 13 Bankruptcy When Unemployed

You can file for Chapter 13 bankruptcy if you're unemployed. Still, you must show you have a verifiable source of income and can afford your plan. Otherwise, the bankruptcy court will dismiss your case.

Where would this income come from if you're not employed? Sources could include:

• revenue from an income-generating business
• rental income
• unemployment benefits
• Social Security funds, or
• retirement benefits.

As long as you show that you have enough income from a verifiable source to fund your plan, the bankruptcy court will "confirm" or approve your case.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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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.