Chapter 13 bankruptcy requires filers to make a monthly payment on a court-approved 3-5 year repayment plan. You don't have to be employed to file a Chapter 13 bankruptcy, but you do have to show you're capable of making those monthly payments to your trustee. For most people, this requires regular income.
Written by Attorney Tina Tran.
Updated July 2, 2022
Unemployment and financial troubles often go hand in hand. So, it may come as a surprise that if you don’t have a job, Chapter 13 bankruptcy may not be the right option for you. In this article, we’ll explain why that is, how Chapter 7 and Chapter 13 differ, and why you may want to consider Chapter instead or wait altogether to file a bankruptcy petition.
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is a federal legal process that allows people to pay back past-due balances over time. A successful Chapter 13 case is centered around a three-year or five-year repayment plan. The filer makes monthly payments to the bankruptcy trustee. The trustee takes a small percentage of the payment as a fee, then distributes the rest to creditors included in the plan.
The plan must be confirmed by the court. To get your plan confirmed, you’ll have to show the bankruptcy court that you can make regular payments over 36 to 60 months. You’ll also have to show that you can continue to pay your current living expenses while making plan payments. Often, people use Chapter 13 to catch up on secured debt. For instance, a homeowner in default on their mortgage loan might be able to avoid foreclosure through Chapter 13 bankruptcy. The whole past-due amount could be included in the Chapter 13 plan and broken out into fixed monthly payments.
Technically, there’s no requirement that Chapter 13 filers have to be employed. And it’s possible to get a Chapter 13 plan confirmed based on another source of regular income. But if you don’t have regular income, the court probably won’t confirm your Chapter 13 plan.
How Is Chapter 7 Bankruptcy Different?
The standards for each type of bankruptcy are very different. Chapter 7 is intended for people who truly can’t afford to pay their unsecured debts like credit card debt, payday loans, and medical bills. Filers don’t need to demonstrate that they have a reliable source of income as they do in Chapter 13.
Income does play a role in Chapter 7, but in a different way. There are certain income limits in Chapter 7, and Chapter 7 filers must pass a means test. The means test compares your annual income to the median income in your state for a similar household. There’s no need to show a minimum income in a Chapter 7 case because there are no plan payments. You get debt relief for certain types of debts in a matter of months.
Chapter 7 can be a good alternative for some people who can’t get a Chapter 13 plan confirmed or for low-income filers. In fact, Chapter 7 may be a better pathway to a fresh start for someone who’s unemployed and has a lot of unsecured debt. But it’s not the right answer for everyone.
Other than a brief period of protection from the automatic stay, Chapter 7 bankruptcy generally doesn’t help with secured debts, like a mortgage or car loan. It also doesn’t wipe out student loans. These are non-dischargeable debts. At least, not directly. Chapter 7 helps some filers address their secured debt by getting their unsecured debt out of the way.
For example, say you’ve been juggling four different credit card payments and a mortgage payment. This has caused you to fall behind on your mortgage payments, and now you’re worried about foreclosure. If you file Chapter 7, you can wipe out that credit card debt and cut those four monthly payments out of your budget. That frees up money each month you can now use to catch up on the mortgage and stay current.
Does It Make Sense To File While I’m Unemployed?
Whether or not it makes sense to file after a job loss depends on your circumstances. If you have mostly unsecured debt and don’t have income for creditors can take through wage garnishment, you may want to wait to file. On the other hand, once you get back to work, your income may disqualify you.
It’s important to consider the pros and cons before filing. If you’re unsure of the best path, you can schedule a free consultation with a local bankruptcy attorney.
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What if My Income Changes After I File Bankruptcy?
The answer is different depending on which type of bankruptcy you filed.
Income Changes in Chapter 7
In a Chapter 7 bankruptcy case, a change in income after filing usually has no effect. But if your income changes soon after you file, you should tell the trustee at your 341 meeting. The trustee may ask you to amend Schedule I to show the new income. If that happens, you may also have to update your expenses. For example, if you were unemployed and went back to work, you’ll probably have increased expenses like higher transportation costs.
In Chapter 13, income changes are more complicated.
Income Changes in Chapter 13
In Chapter 13, your repayment plan is based on your income and expenses. If your income changes, the plan may have to change. Imagine, for instance, that you were unemployed when you filed for Chapter 13 bankruptcy. You managed to get a plan confirmed based on a small monthly income from a family trust. Your monthly payments were low and the plan didn’t include any payment to unsecured creditors.
Six months into the five-year payment plan, you start a new job. It’s a higher-paying job so your income doubles. You have a lot more disposable income. The bankruptcy trustee or a creditor may ask the court to modify the plan and increase payments to unsecured creditors.
This is another reason that filing for Chapter 13 bankruptcy can backfire for unemployed people. Getting back to work will likely change your income significantly and change your options. You’re free to drop your Chapter 13 case at any time. But when you do, the automatic stay ends. That means creditors and debt collectors can come after any remaining past-due balances.
To get a Chapter 13 plan confirmed, you’ll need a regular source of income and enough income to support your plan and your current living expenses. That may be tricky if you’re unemployed. Plus, uncertainty about the future can make it hard to know whether a long-term commitment to a Chapter 13 plan makes sense.
Chapter 7 may be a good alternative for some people considering bankruptcy while unemployed. But Chapter 7 generally won’t help with secured debt. The best solution depends on your income, the type of debt you’re trying to resolve, and your personal goals.