Can I File for Chapter 7 Bankruptcy If I Am Unemployed?

If you are unemployed, you can still file for Chapter 7 bankruptcy. Find out how your employment status might affect your ability to pass the means test.

By , Attorney · University of the Pacific McGeorge School of Law

Not only can you file for Chapter 7 while unemployed, but it's a great way to recover financially after a time of decreased income. Also, being unemployed might make it easier for you to qualify for Chapter 7 bankruptcy.

Like most Chapter 7 bankruptcy filers, you'll have to pass the means test to file for Chapter 7. The lower your income, the easier it is to qualify. Learn more about filing for bankruptcy when unemployed, including:

  • whether filing for bankruptcy makes sense
  • why unemployed people should have a bankruptcy plan
  • essential bankruptcy planning tips, and
  • how to use Chapters 7 and 13 after unemployment.

Once you've learned about filing for bankruptcy while unemployed, check out the resources provided at the end of the article. You'll find links to applicable bankruptcy forms and additional articles we think you'll enjoy.

Should You File for Bankruptcy If You're Unemployed?

In many cases, the answer is yes. Even though your credit score will take a hit, freeing yourself of debt will ease your mind and let you move forward confidently. Plus, credit scores recover faster than most people realize. Often faster than if you did nothing.

Learn about rebuilding credit after bankruptcy.

Why You Need a Bankruptcy Plan When Unemployed

Like most unemployed people, you're unsure when you'll find a new job. Knowing which bills you should pay and which assets to sell, if needed, will help you develop a plan and financially recover more quickly.

For instance, having a plan will help you avoid common pitfalls, such as the urge to withdraw retirement funds to pay bills you could erase in bankruptcy. You'd be in a much better financial position if you emerged from bankruptcy with less debt and your retirement still in place.

Bankruptcy Planning Tips for Unemployed People

No one wants to file for bankruptcy, but people considering bankruptcy rarely find another way out. Be aware of this and start planning and committing to making business-like financial decisions. You can use a few quick rules of thumb to create your plan.

Know which bills you can "discharge" or erase in bankruptcy.

Do you know whether you can erase enough debt in bankruptcy to offset the negative credit score impact? Make a list of obligations you can eliminate and those that are "nondischargeable" and you'll remain responsible for paying.

If you run short on funds, the debts you can erase fall lowest in payment priority. If you know you qualify for bankruptcy and intend to file, you probably don't want to waste money paying them.

Know which property you can protect in bankruptcy.

You'll also want to list your property, locate your state exemptions, and use the exemptions to evaluate whether you can cover everything you own. Understanding what you can protect in bankruptcy will help you answer these questions when making your plan.

  • Which property should I sell if you need it for living expenses?
  • Can I protect my retirement savings and other assets in bankruptcy?

If you need money to live, sell the property you can't "exempt" or protect first. Remember that you can sell any property and use the proceeds for living expenses. What you aren't allowed to do is hide property from creditors or take inappropriate actions to avoid paying them.

Know whether you qualify for bankruptcy.

Filing for bankruptcy when unemployed often makes sense, but the timing of your bankruptcy filing will depend on your financial situation. Factors to consider include:

  • Do I qualify for bankruptcy now?
  • Could I qualify for bankruptcy once I start working again, or should I take advantage of my decreased income and file for Chapter 7 now?

Most unemployed people will qualify for Chapter 7, but filing for Chapter 13 can be more difficult. However, Chapter 13 offers benefits unavailable in Chapter 7. Understanding both chapters can give you an advantage when getting your finances back together.

How Chapters 7 and 13 Help Unemployed People

Chapters 7 and 13 work in different ways, and with planning, unemployed people can use one or both to get back on track. Here's how each chapter works.

Chapter 7 Erases Debt Quickly

Most unemployed people file for Chapter 7 bankruptcy. Chapter 7 lets people wipe out qualifying debts quickly, including credit card balances, medical bills, gym memberships, back rent, and phone and utility payments. A Chapter 7 filer can eliminate these bills, stop collection actions, and rebuild a credit score.

In Chapter 7, any property you can't protect with a bankruptcy exemption gets sold for the benefit of creditors, so it's possible to lose assets in this chapter. Evaluate your property carefully.

Chapter 13 Offers a Payment Plan

Unlike Chapter 7, Chapter 13 filers don't lose property. Instead, they pay creditors the value of nonexempt property—those things that aren't covered by an exemption—through the repayment plan.

Unemployed people rarely file for Chapter 13 because most filers don't have enough income to pay into a three- to five-year payment plan. But filing for Chapter 13 is possible and can be worth exploring. We explain more below.

How to Use Chapter 7 Bankruptcy After Unemployment

Most people qualify for Chapter 7 when unemployed because of their reduced income. As long as you aren't at risk of losing important property, you'll likely choose Chapter 7 during unemployment.

You'll find out if you qualify for Chapter 7 bankruptcy by taking the Chapter 7 means test. If you're unemployed, there is an excellent chance that you qualify for Chapter 7 bankruptcy based on your reduced income. Here's why.

The means test looks at your average income six months before filing. Your six-month average decreases each month you're unemployed and receiving unemployment benefits. So even if you don't qualify immediately, you'll probably be eligible after a few months.

Learn more about the means test and Chapter 7 eligibility.

How to Use Chapter 13 Bankruptcy After Unemployment

Chapter 13 requires paying into a repayment plan, and most unemployed people find it easiest to qualify if they wait until they find a job. But Chapter 13 can be used another way.

Filing Chapter 13 Immediately After Chapter 7 While Unemployed

After filing for Chapter 7, it isn't unusual to owe a support obligation, tax debt, or another nondischargeable debt. People who need time to pay can file for Chapter 13 and pay off the nondischargeable debt over three to five years. Some bankruptcy lawyers call this a "Chapter 20" bankruptcy filing.

Why Filing for Chapter 13 Immediately After Chapter 7 Is Possible

You likely know you must wait several years before filing for bankruptcy again. But did you know the bankruptcy waiting period applies to the debt discharge and not the bankruptcy filing itself?

Suppose you don't need a debt discharge because you already wiped out qualifying debt in Chapter 7. In that case, you could file for Chapter 13 bankruptcy and keep creditors at bay while paying bills over time.

Everyone Has Unique Financial Needs

Not everyone will want or need to use the Chapter 20 strategy. Here are situations that wouldn't follow this approach:

  • You don't have nondischargeable debt. If you erase all of your debt in Chapter 7 or can afford to pay your nondischargeable debt, you wouldn't need to file for Chapter 13.
  • You'd lose property in Chapter 7. Suppose you would lose a house, car, or other important property by filing for Chapter 7 first. In that situation, you might be better off working with your mortgage or car loan lender on a loan modification or filing for Chapter 13 first, if possible.

Learn what happens to mortgages in bankruptcy.

Speak With a Bankruptcy Lawyer

Because you should consider many factors before filing for bankruptcy, it is often wise to consult an experienced lawyer to discuss your options and any negative consequences before deciding on a strategy.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

More Bankruptcy Information

Bankruptcy Forms and Document Checklist

U.S. Court Bankruptcy Form webpage

Chapter 7 and 13 Bankruptcy Forms

Chapter 7 Bankruptcy Document Checklist

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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.

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