Can I File for Bankruptcy if I am Unemployed?

People who file for Chapter 7 bankruptcy must meet certain income qualifications. In most 

cases, debtors who fail to meet income requirements do not qualify for Chapter 7. People with higher income levels often must pursue a repayment plan under Chapter 13 to take control of debt. People who are currently unemployed or who have experienced a reduction in income during the COVID-19 pandemic might now qualify for Chapter 7 bankruptcy, even though they may not have qualified for bankruptcy before the pandemic. This is because the Chapter 7 “means test” measures a person’s income in the six months before filing for Chapter 7 bankruptcy, which means that if a person experienced a reduction in income because they are out of work during the pandemic, their income might not be low enough for the person to qualify for Chapter 7 bankruptcy. Because this is a complex issue, the following discusses some important considerations when qualifying for Chapter 7 bankruptcy. 

How Chapter 7 Bankruptcy Function

Chapter 7 bankruptcy erases all qualifying unsecured debts. As a result, this type of bankruptcy is ideal for low-income filers with few assets. Another attractive aspect of Chapter 7 bankruptcy is that debtors are allowed to keep “exempt property” necessary to maintain a household or a career. 

As mentioned, if a person lost a high-paying job within the last six months, the individual’s income might still be considered too high to qualify for Chapter 7 bankruptcy under the means test. Other individuals encounter problems qualifying for Chapter 7 bankruptcy if they find a job during the bankruptcy process. In these situations, a person’s reported monthly expenses are often much less than that individual’s reported monthly income. In these situations, a bankruptcy trustee might recommend that the bankruptcy court converts a person Chapter 7 case into Chapter 13.

The Income Requirements for Chapter 7 Bankruptcy

The Chapter 7 means test includes several bankruptcy forms, including the Chapter 7 statement of current monthly income, a statement of exemption from presumption of abuse, and a chapter 7 means test calculation. Most times, applicants need only complete the first form, but it is critical to understand the role of each of them. 

To qualify for Chapter 7 bankruptcy, a person must complete a bankruptcy form referred to as the Means Test, which compares a person’s income to the average income of other households in the state. If a person’s income is greater than the state’s average income, the applicant does not qualify for Chapter 7 bankruptcy. In California, if a person’s median income is over $12,475 then that applicant fails the means test and does not qualify for Chapter 7 bankruptcy. If a person’s total monthly income over the next 60 months, however, is less than $7,475, then that individual passes the means test and qualifies for Chapter 7 bankruptcy.

Monthly income includes all income that a person received during the six months before filing for bankruptcy. This means that a person must add all income during the past six months and divide the total by six to determine that person’s average or current monthly income. Gross income should be utilized when deciding on average monthly income with the exception of income received from rent or operation of a business or profession. For rents and business income, a person should use the net income reported to the Internal Revenue Service (IRS) after deducting necessary business expenses.

Remember, even if an applicant fails the means test and the person’s median income is greater than the state’s median income, it might still be possible to qualify for debt forgiveness by completing the section portion of the means test. This second part of the means test determines an applicant’s disposable income, which is the money that a person has left over after paying allowable living expenses. If after deducting allowable living expenses from average monthly income, the figure is negative or zero then the applicant passes the means test.

How Social Security Factors Into Bankruptcy

Social security benefits are often not included in mean test calculations. Some bankruptcy courts, however, have found that unemployment compensation is a type of social security because, in accordance with federal law, unemployment compensation is funded through the Social Security program. In California, social security benefits do not count as income for purposes of the means test. Filing bankruptcy will not cause social security benefits to stop. This is true whether you are a senior citizen or a disabled individual receiving either Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI).

Chapter 13 Bankruptcy is Sometimes a Better Option

Many unemployed individuals who pursue bankruptcy end up selecting Chapter 7 because it helps to wipe out debts associated with things like credit cards and medical. Chapter 13 bankruptcy has some advantages that are not available in Chapter 7. For example, if you are interested in paying back non-dischargeable priority debts like child support, filing for Chapter 13 bankruptcy is often a better option. Chapter 13 bankruptcy can also eliminate certain types of junior mortgages.

Unfortunately, however, unemployed individuals often do not have sufficient income to make Chapter 13 bankruptcy a legitimate choice. This is because Chapter 13 bankruptcy involves the creation of a three to a five-year repayment plan. Payments made through this plan are then received by a bankruptcy trustee and used to pay creditors. If you do not have employment income, however, you might be able to establish that you have some source of income and can afford your repayment plan. A source of income might include business or rental income.

Other Alternatives to Filing for Bankruptcy

While bankruptcy might be the best option for some people, there are always alternatives to pursuing the bankruptcy process. Debt consolidation is one of the most common and attractive options. Debt settlement can also provide the opportunity to take control of debts without filing for bankruptcy. 

Speak with an Experienced Bankruptcy Attorney

Do not let concerns about how you will pay for a bankruptcy attorney dissuade you from obtaining the help you need to pursue the bankruptcy process. Contact attorney Melanie Tavare today to schedule a free case evaluation.