Job loss is one of the most common triggers for a bankruptcy filing. That makes sense, since most people who abruptly lose their primary source of income aren’t able to keep up the financial commitments they made based on that salary. But that doesn’t mean that every option will be available to the recently unemployed, or that filing for bankruptcy immediately or shortly after job loss is the best approach.
Qualifying for Bankruptcy without a Job
The first step in determining Chapter 7 income eligibility is to compare your income to the median income of a household of the same size in your state. If you’re unemployed, chances are good that you’ll fall below that line. The median income for a single person in California is just over $5,000/month. But, it’s not a sure thing. For example, if you’re married to a high earner your household income may be above the median even without your income, or your unemployment compensation combined with your spouse’s income may cross the line.
Establishing eligibility may also be slightly more complicated if you’ve just left a good-paying job, since the standard analysis involves looking at income from the preceding six months. While you’ll have an opportunity to explain that circumstances have changed and past income doesn’t fairly represent what you can expect moving forward, you may be advised that a presumption of abuse has arisen and have to provide additional information to overcome the presumption.
Technically, you don’t need a job to file for Chapter 13 bankruptcy. But, the centerpiece of a Chapter 13 bankruptcy is a three to five year repayment plan. In order to get a plan confirmed, you must be able to establish that you have a regular source of income that will allow you to reliably make plan payments.
This source of income doesn’t have to be employment. Social Security benefits, disability, a pension, or some other source of regular income may suffice, as long as it is sufficient to allow you to pay regular living expenses and fund the Chapter 13 plan. You may even be able to get a plan approved while receiving unemployment compensation, but here too, the process may be a bit more complicated. A Chapter 13 plan lasts considerably longer than eligibility for unemployment benefits, so your plan will have to anticipate future earnings. Since that’s speculative, you and the Chapter 13 trustee may disagree as to what is a realistic income projection. Depending on when you find another job and how your earnings compare with your projections, you may have to petition to modify the plan. If you don’t secure new employment before unemployment compensation runs out, you may have to dismiss your bankruptcy case or see it dismissed for failing to make plan payments.
Should You File for Bankruptcy While Unemployed?
Every situation is different, and there is no one-size-fits-all answer to this question. If you’re unemployed and considering bankruptcy and other debt relief options, the best next step is to talk with an experienced Los Angeles bankruptcy attorney. A lawyer who has a thorough knowledge of bankruptcy law and of local bankruptcy court procedures and trustee priorities will be able to give you a clearer understanding of your options and the factors to consider.
Often, though, it can be a mistake to file bankruptcy too quickly after job loss. There are several reasons someone who has just suffered a loss of or significant decline in income might decide to delay a bankruptcy filing. One is that if income isn’t replaced in fairly short order, debt may continue to grow. That means filing too soon may cut off the ability to discharge all of the debt incurred during unemployment. Another is that for someone with significant secured debt or non-exempt property, Chapter 13 may be a better option–but, it may be impossible to create a workable Chapter 13 plan before locking down a new job.
Depending on how recent the job loss was and the petitioner’s previous financial status, there may be transactions or transfers subject to “unwinding” by the bankruptcy trustee. And, of course, it’s difficult to know what to expect in the early days. While job loss can be jarring and the prospect of mounting debt can be daunting, acting too quickly may mean filing unnecessarily.
On the other hand, sometimes it’s important to act quickly. A well-timed bankruptcy filing can stop wage garnishment, prevent repossession of a vehicle, or even freeze a foreclosure action. That’s why it’s so important not to guess or rely on general information when you’re working to protect your financial future and create a solid foundation to rebuild on after job loss.
If you’ve lost your job and are unsure whether bankruptcy is the right answer for you, or whether the time is right to file, help is available. We offer free consultations to people who are struggling with debt in and around Los Angeles. Schedule yours right now by calling 877-439-9717. Or, if you prefer, fill out the contact form on this page and we’ll reach out to discuss how we may be able to help.