job loss and bankruptcy

Bankruptcy without a job

There is no requirement that you be employed to file for bankruptcy.   For some reason this rumor is floating around out there, I hear this from time, from potential clients.  In fact, bankruptcy without a job, is one of the most common reasons people file for bankruptcy in Utah. However, being unemployed can affect the outcome and success of your bankruptcy filing. This depends mostly on whether you are filing a Chapter 7 or Chapter 13 bankruptcy.

Chapter 7 bankruptcy is designed to wipe out unsecured debts (credit cards, medical bills, personal loan, for example) for lower income debtors with few or no assets. In most cases, creditors will not receive anything because the debtors don’t have any non-exempt property that can be taken and sold. Since debts are wiped out without paying anything to creditors in the majority of Chapter 7 bankruptcy cases, debtors must pass a means test to qualify for a Chapter 7. The means test compares your household income against your state’s median income for a similar household. If your income is below the median, you qualify automatically. If you are above median, you must show that you have no disposable income because you have high allowable expenses. Most unemployed debtors have no income or they collect unemployment benefits which are normally well below Chapter 7 income limits. So being unemployed usually makes it easier for you to qualify for a Chapter 7 bankruptcy.

In a Chapter 13 bankruptcy, debtors pay back all or at least a portion of their debts during a three to five year repayment plan. Chapter 13 also allows debtors to catch up on mortgage that they may be behind on, get rid of their second mortgage, reduce amounts owing on some car loans, or pay back non-dischargeable debts such as child support or certain taxes. Because of this Chapter 13 is used not only by debtors who don’t qualify for a Chapter 7 but also by those who choose to file a Chapter 13 instead of Chapter 7 to take advantage of these additional benefits. Since you are required to make monthly plan payments to the bankruptcy trustee, Chapter 13 is generally for debtors with regular income.

However, if you are unemployed, you can still file for Chapter 13 bankruptcy. Many unemployed debtors collect unemployment benefits, social security, or have other sources of income such as rental income which can be used to fund their plan. If you can show that you have enough income coming in from sources other than employment to afford your plan, then your case will likely get approved by the court. If you have no income, the court will dismiss your case unless you can prove that you are able to afford your bankruptcy plan. If you find a job during bankruptcy, you will usually be required to notify the court and provide further documentation.

As I seem to say all the time every ones situation is different – always speak with an experienced bankruptcy lawyer before filing for bankruptcy.  If you are in Utah come in for a free in office consultation.  Click HERE to set up an appointment.

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