Filing for Bankruptcy While Unemployed
If you've lost your job, find out how that will affect your bankruptcy case.
If you are unemployed, it may affect what type of bankruptcy you file and when you should file your case. Here are some factors to consider if you've lost your job and you're planning to file for bankruptcy.
Chapter 13 Bankruptcy: Probably Not an Option
When you file for Chapter 13 bankruptcy, you must propose a plan to repay some or all of your debt over three to five years. Some types of debt must be paid in full in Chapter 13, including back taxes and child support. Other types of debt can be paid only in part (or not at all). You don't lose any property in Chapter 13, but you must have sufficient income to make your required monthly payments under the plan. Without a steady income, you won't be able to propose a plan the judge will approve. So, until you find a job again, Chapter 13 is probably not an option for you.
Chapter 7 Bankruptcy: Timing is Everything
In Chapter 7 bankruptcy, you must give up any nonexempt property you own: property that is not protected by state law (or federal law, if your state allows you to choose between the state's exemption list and the federal exemption list). In most states, you can exempt some equity in your home, a car, your clothing, furniture and other household items, and the tools of your trade. If you own valuable nonexempt property, the bankruptcy trustee can take it, sell it, and distribute the proceeds to your creditors.
Beyond what they receive from your nonexempt property, however, your creditors are not repaid. You don't have to submit a repayment plan or have a steady income to make use of Chapter 7, so being unemployed won't hurt your case. In fact, it may be a benefit, if you time it right.
To use Chapter 7, you have to pass a "means test." The means test is intended to force debtors who could afford a repayment plan to use Chapter 13 rather than Chapter 7. The means test compares your "current monthly income" to the median income in your state for a household of your size. If your income is less than the median, you may use Chapter 7. If your income is more, you will have to subtract your allowed expenses to find out whether you would have enough disposable income left over (in the eyes of the law) to afford Chapter 13.
Here's where unemployment could be an advantage: Although the means test refers to your current monthly income, you actually have to use your average income over the six months before you file for bankruptcy. If you just lost a high-paying job, your "current" monthly income might look quite high to a bankruptcy court, even if you aren't taking home a paycheck at all. But if you wait a few months, you can factor in a few months of no to low income, and bring your "current" monthly income down below the median. You'll have to do some math to figure out when you should file to avoid failing the means test.