Everything You Need To Know About Unemployment and Bankruptcy
- You can still file for bankruptcy if you are unemployed and receiving unemployment benefits.
- Your income and employment status can affect which type of bankruptcy best meets your needs.
- In some states, your unemployment benefits may be counted as part of your income, which will affect how you file.
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The U.S. does not typically have the most generous unemployment benefits. If you are out of work, you can quickly find yourself drowning in a mountain of bills, debt collector letters, and car loan payments. There may be no other option but to rely on credit cards to get by, which only worsens things by saddling you with long-term credit card debt.
While you might not like to consider bankruptcy, it is an option to help rid yourself of bad debts, possibly hold onto your home, and get a fresh start. Your employment status will affect your bankruptcy, so it’s essential to understand what to expect from this process.
Here are some frequently asked questions (FAQs) about bankruptcy and unemployment insurance. However, unemployment and bankruptcy laws differ in every state, so talk to a bankruptcy lawyer for legal advice about your bankruptcy case.
Yes, you can file for bankruptcy if you don’t have a job. Unemployment is one of the most common reasons for financial struggles. The most common types of bankruptcy are Chapter 7 and Chapter 13 bankruptcy. However, Chapter 13 is generally only if you continue earning income. Most people receiving unemployment benefits or without income will file Chapter 7 bankruptcy.
Yes. You do not need a stream of income to seek bankruptcy protection. Having no income, including unemployment benefits, could make it easier to pursue a Chapter 7 liquidation bankruptcy that quickly wipes out your unsecured debts, such as credit card, utility, and medical bills. There may still be filing fees, but you can ask the bankruptcy court to waive the fees or pay in installments.
Everyone who files for bankruptcy protection must undergo the means test. This test examines how much money you have versus your debts. In some states, unemployment benefits will count as income in the means test.
The means test will play a large part in determining whether you file for Chapter 7. It will look at:
- How long you’ve been unemployed
- What you were making before losing your job
- Your prospects for finding a new job, which is harder during economic downturns
- If you have other sources of income like unemployment benefits, Social Security, investments, etc.
The type of bankruptcy will depend on your situation. The most common options include:
The most common type of bankruptcy protection is Chapter 7 liquidation bankruptcy, which will put an automatic stay on any collections and garnishment. The process takes about four to six months, allowing you to quickly discharge most of your unsecured debts under the bankruptcy code. However, you may still be responsible for child support, student loans, and other non-dischargeable debt.
The means test will look at your median income over the last six months, and if you’re unemployed, you likely will make enough to qualify for a Chapter 7 filing. If you still make too much to qualify for Chapter 7, your attorney can help you better evaluate your options. You may even be able to make a case that you will still have a hard time repaying your debts.
Known as repayment bankruptcy, a Chapter 13 filing involves consolidating your debts into a repayment plan and negotiating a set time to make payments, typically three to five years.
You do not have to be employed to qualify for Chapter 13, but it could be more challenging to make your monthly payments as part of your bankruptcy if you are unemployed. Again, this is where a bankruptcy attorney’s help is essential. Your attorney will help you think through your bankruptcy’s present and long-term ramifications, which chapter you file under, and the effect of your unemployment status.
Sometimes, the state office of unemployment compensation makes a mistake and gives you too much money. In general, overpayment of unemployment benefits is available for bankruptcy discharge as long as you aren’t responsible for the overpayment. For example, if you fraudulently claimed you didn’t work as a way to get more unemployment, that can’t be discharged.
There are costs of filing for bankruptcy, but your bankruptcy attorney can help you get some filing fees and court costs waived or included in the bankruptcy estate. An attorney may be able to set up a payment plan to help you pay the legal costs of filing with monthly payments. Talk to an experienced bankruptcy attorney about your legal options for debt relief.
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