There is no bar to filing for bankruptcy if you are unemployed. Like all Chapter 7 bankruptcy filers, you'll have to pass the means test in order to file for Chapter 7. The lower your income, the easier it is to pass the means test, so being unemployed might make it easier for you to qualify for Chapter 7 bankruptcy.
The Chapter 7 Means Test
The means test determines whether you qualify for Chapter 7 bankruptcy based upon your income during the six months before you file bankruptcy. If you ‘re unemployed, there is a very good chance that you qualify for Chapter 7 bankruptcy based upon your reduced income.
The means test looks at your average income over the six months before filing and if your income is below the median (the average income for a family of the same size in your state), you will qualify to file under Chapter 7. If you’ve been receiving unemployment, your income is probably significantly less than it was when you were employed, and that increases your chances of qualifying for a Chapter 7 bankruptcy.
If your average income over the previous six months is over the median, you may still qualify for a Chapter 7. The means test allows you to indicate whether special circumstances apply that would allow you to qualify. Indicating that you recently lost your employment may be sufficient to prove that you do not have the money with which to repay your debts.
(For details on how the means test works, see The Means Test & Chapter 7 Eligibility.)
What Happens to Your Debts and Property in Chapter 7?
Chapter 7 bankruptcy means that your unsecured debts are wiped out. Unsecured debts are those such as credit cards, medical debts, personal loans, and utilities, for which you have not assigned any personal property as collateral for the loan. In a Chapter 7, the only debts you are responsible for are secured debts, such as your home or car, which you choose to keep. If you surrender your car or home, those debts are also discharged.
After suffering a loss of employment, Chapter 7 bankruptcy offers a unique opportunity to get back on your feet. You can discharge your unsecured debts, and if you can no longer afford your home or car, you can surrender those items and discharge the debt in your bankruptcy as well.
To learn more, see Chapter 7 Bankruptcy.
Should You File for Bankruptcy If You Are Unemployed?
Whether you should file for bankruptcy if you are unemployed depends on your particular situation. A few factors that might influence your decision include:
- Will you incur more debt in the future before you secure new employment? (If so, you might want to hold off on bankruptcy, and file when you can get rid of more debt.)
- Are you unlikely to qualify for Chapter 7 once you start working again? (If this is your situation, filing while unemployed might be a good idea.)
Because many other factors come into play, it is often wise to consult with an experienced bankruptcy attorney to discuss the optimal timing of your bankruptcy filing.