Many times financial difficulties are a result of temporary unemployment. If the burden of debt has become more than you can reasonably handle, filing for bankruptcy very well might be your best option for getting back on the right track. This leaves many people wondering if they can file for bankruptcy without a job.
The good news is that you do not have to be employed to file for bankruptcy, but there are nuanced complexities that we’ll get into shortly. Bankruptcy laws don’t explicitly require that you be employed, but your past and present income can impact your ability to qualify for Chapter 7 and Chapter 13 bankruptcy in different ways.
For example, if you have recently lost a high-paying job, it could make it extremely difficult to qualify for Chapter 7 bankruptcy. On the other hand, if you are unemployed and lack the income to keep up with a repayment plan, Chapter 13 may not be an option.
Employment Status When Filing for Bankruptcy
Whether you file for Chapter 7 or Chapter 13 will depend on your past and present financial situation. The two different consumer bankruptcy types each offer unique benefits. The most apparent difference is that Chapter 7 allows you to quickly cancel debts while Chapter 13 enables you to keep assets by agreeing to adhere to a repayment plan.
The unique qualifications associated with each bankruptcy type will impact how unemployment affects the bankruptcy process. The following questions need to be considered:
- How long you’ve been unemployed?
- What was your income at your most recent place of employment?
- Are you starting a new job soon?
- Do you have any other sources of income?
- Are you currently drawing unemployment?
- Do you intend to file for Chapter 7 or Chapter 13 bankruptcy?
Understanding Chapter 7 Bankruptcy
Chapter 7 bankruptcy is ideal for low-income filers who have little or no assets. It quickly relieves heavy financial burdens by eliminating unsecured debts, such as medical bills, credit cards, cash advances, and unsecured loans. It is possible to keep assets associated with secured loans like a house or car in Chapter 7, but it requires that you continue making regular monthly payments in most cases.
Keep in mind that you won’t lose everything in a Chapter 7 bankruptcy as you are entitled to keep exempt property. However, your nonexempt property may be repossessed or sold so that the proceeds can go towards repaying creditors. Most individuals are able to protect all their property with their exemptions. On average, a Chapter 7 bankruptcy takes three to four months to complete.
Chapter 7 Bankruptcy Qualifications
Not all filers will qualify for Chapter 7 bankruptcy, however, being unemployed can make the process easier if you have been without a job for a long period of time.
The Chapter 7 filing process requires debtors to pass the means test, which weighs your household income against the average income in the state of Tennessee for your household size. The means test is a two-part test, but both steps aren’t always required.
The Means Test
The purpose of the means test is to compare your total income to the median income in Tennessee for your household size. This is calculated by adding the gross income (total amount before deductions) earned by your household during the six month period leading up to the filing date of your bankruptcy petition and taking the monthly average. If your household income is below the median, you will qualify without the need to proceed to the next step.
If your household income is above the median, you will be required to subtract allowable expenses from your gross household income. Some qualified deductions include income taxes, childcare, housing costs, utilities, and food. After calculating your gross income minus deductions, the means test will determine if you have disposable income to pay back to creditors.
Difficulties with Qualifying for Chapter 7
Losing a High-Paying Job
One of the biggest potential roadblocks to passing the means test and qualifying for Chapter 7 bankruptcy is if you have recently lost a high-paying job. However, this roadblock is temporary and can be circumnavigated with time.
Regardless of your monthly earnings, the means test requires that you report the amount you earned during the prior six months. If the total exceeds the median, there may be a presumption of abuse which may still be rebutted.
However, a solution to this dilemma is to wait a few months. If you are still unemployed, your six-month average income may drop rapidly, allowing you to qualify without needing to rebut the presumption of abuse.
Getting a New Job
Getting a new job during the Chapter 7 bankruptcy process can present difficulties because the court will consider more than just the result of your means test. For example, any remaining disposable income left over after paying your bills will be scrutinized.
If your new job leaves with a significant amount of discretionary income at the end of every month, the trustee may try to convert your Chapter 7 into a Chapter 13 bankruptcy.
Understanding Chapter 13 Bankruptcy
It can be difficult but not impossible to qualify for Chapter 13 bankruptcy if you are unemployed. This is because, in Chapter 13, you will establish a monthly payment schedule in order to repay creditors. Maintaining your Chapter 13 bankruptcy essentially requires an established income.
The Chapter 13 structure requires that the debtor must repay a portion (or all) of their debts over a period of three-to-five years. One of the biggest benefits of Chapter 13 is that it enables you to consolidate debts into one monthly payment. For example, you can include mortgages, certain taxes, car loans, and other non-dischargeable debts. In some cases, you can even discharge your student loans.
Chapter 13 Bankruptcy Qualifications
If you are currently jobless, it is still possible to qualify for Chapter 13 bankruptcy. However, the lack of employment income means that you’ll have to prove an alternative source of verifiable income to the bankruptcy trustee, including unemployment compensation. Without a source of reliable income, your case will not be confirmed.
Verifiable income sources can come from many places. For example, a repayment plan can be funded with income from a rental property or business interest. Additionally, you can use retirement funds, Social Security, or unemployment benefits. The main point is that you will be required to show that you can stay on top of your payment plan in order to qualify for a Chapter 13 bankruptcy.
The Top Bankruptcy Attorneys in Middle Tennessee
When making the decision to file for bankruptcy, it is invaluable to enlist the help of an attorney you can trust. The experienced bankruptcy attorneys at Flexer Law will work diligently on your behalf to provide the best financial outcome for you.
Regardless of your financial situation or employment status, we will guide you through the bankruptcy filing process with confidence. If you are worried about the cost of hiring an attorney, know that we offer payment plans to ease the burden, and in most cases, no money down on Chapter 13 plans.
We have three office locations throughout Middle Tennessee to accommodate your legal needs. Contact us for a free consultation, either in person or virtually, and we will get to work on finding the best solution for getting your financial life back on track.