Is it a good idea to file bankruptcy if you’re unemployed?

Everyone has a different idea of what bankruptcy is. Some people think that it’s a scary court proceeding in which the debtor has to give up all her possessions. Others know just enough to think that it’s a process by which the debtor has to pay back all of her debt over time. Others think that the debtor is required to yell,”I declare bankruptcy!” on the courthouse steps. The truth is that there are different types of bankruptcy for different situations, even if the debtor is completely unemployed.

Losing a job is a very common reason that leads people to file bankruptcy. Job loss makes it harder to keep paying debts and keep up with the bills. Bankruptcy can alleviate some of that stress and make it so that the debtor can get back on her feet.

A typical Chapter 7 case is designed to wipe out unsecured debts, like credit cards, medical bills, and the like for low-income debtors with few assets. During the lion’s share of these cases, creditors don’t receive anything because there is nothing left to squeeze out of the debtor. In these situations, it may actually make the bankruptcy process a little easier to be unemployed. This is because it will very likely mean that the debtor passes the “means test.” The means test exists to ensure that people aren’t filing Chapter 7 when they should be filing Chapter 13 and paying back a portion of the debts. So, since most unemployed debtors have no income, they are very likely to be below the income limits for Chapter 7.

A Chapter 13 is very different from a Chapter 7 because the debtor is required to back all or a portion of his debts via a three to five year repayment plan. This can help unemployed debtors that have some form of income or family support who also have assets like homes and vehicles to protect. That is to say, Chapter 13 allows a debtor to catch up on mortgage arrears, lower car loan payments or balances, eliminate second mortgages, or catch up on certain taxes.

Obviously, such a plan requires some level of monthly income to make it feasible. So even an unemployed debtor may have income from unemployment benefits, social security income, or perhaps family support. If the debtor can show the trustee that there is enough income of some type to afford to make payments, then the Chapter 13 plan will likely get approved by the Court.

Whether the unemployed debtor needs to just get rid of all the unsecured debt, or she has assets that she needs to protect for her future, bankruptcy has many benefits and solutions for a wide variety of situations. The only wrong thing to do when problems start to add up is to refuse to seek help. If you are unemployed, don’t wait, talk to a bankruptcy attorney to discuss options.