Can I File Bankruptcy Even Though I’m Unemployed?

During the coronavirus pandemic, many people lost their jobs and had to rely on unemployment. If your only income comes from unemployment benefits, it can be difficult to pay your daily living expenses as well your debts. In this case, bankruptcy may be a good option. You don’t need to be employed to file bankruptcy. Any unemployed person can file bankruptcy if they meet the eligibility requirements.  

Filing Chapter 7 Bankruptcy While Unemployed Isn’t Unusual

Losing your job means you lose your normal income. Unfortunately, the loss of income is a common reason people default on debt payments. This leads many people to file bankruptcy, especially when there are slim prospects of a new job. It’s hard to pay your bills if you’re unemployed. That’s why it’s not unusual for unemployed people to file a Chapter 7 bankruptcy case to permanently eliminate eligible debts like credit cards and medical bills.

In addition to permanently discharging your debts, bankruptcy provides protection while your case is pending. The moment that you file your bankruptcy petition, the automatic stay goes into effect. The stay bans your creditors from continuing with most collection efforts, including wage garnishment.

One benefit of the automatic stay is that it prevents your creditors from contacting you, including calling you. If you’re actively job searching you’ll need to regularly communicate with potential employers by phone. If creditors are constantly calling, you may be more reluctant to answer the phone because of the concern that it might be a debt collector.

Even without the automatic stay, the Fair Debt Collection Practices Act (FDCPA) limits when debt collectors can call you. They aren’t allowed to call before 8 a.m or after 9 p.m. local time. Also, debt collectors can’t call at an inconvenient or unusual time. Bankruptcy extends these limits and stops all phone calls from debt collectors. If a creditor calls you after you file bankruptcy, the creditor violates the automatic stay and is subject to sanctions by the bankruptcy court. 

You Can File Chapter 7 Bankruptcy Without Money, While Unemployed

Even if you’re unemployed and have little income, you can file bankruptcy. The main costs of filing bankruptcy are attorney fees, filing fees, and credit counseling course fees. If your income is below 150% of the federal poverty guidelines, you may be eligible to have the filing fee waived by the bankruptcy court. Many credit counseling providers will also waive course fees if you’re eligible. 

You don't necessarily need a bankruptcy attorney to file bankruptcy. Even if you don’t hire an attorney, you could take advantage of the free consultation many bankruptcy attorneys offer. This is a prime opportunity to get some legal advice and learn more about your debt relief options. Still, you can file a bankruptcy case without an attorney. Upsolve has a free filing tool you can use to file Chapter 7 bankruptcy. 

Unemployment Income and the Bankruptcy Means Test

Qualifying to file a Chapter 7 bankruptcy case mainly consists of completing the means test. The Chapter 7 means test is a calculation that primarily uses your income to determine your eligibility. If your income is at or below the median income for a household of your size in your state, you’re eligible to file. 

Unemployment compensation counts as income on the Chapter 7 means test, but generally, your benefits won’t be higher than the median income for your household size. 

The means test considers all income (except Social Security) that you’ve received for six months prior to filing your bankruptcy case. This is called the look-back period. So if you’ve been unemployed for more than six months, you’ll likely pass the means test. But if you lost a well-paying job at some point during the six-month look-back period, you may have too much income to pass the means test simply because of timing.

It’s Hard To File Chapter 13 While Receiving Only Unemployment Benefits

Chapter 7 and Chapter 13 bankruptcy are the most common types for individuals. There are certain reasons that you may want to file a Chapter 13 case instead of a Chapter 7 case. Some people file a Chapter 13 case because they make too much money to qualify to file a Chapter 7 case. Others do it to catch up on a mortgage or car loan that’s past due. 

The type of bankruptcy, you’ll want to file will also depend on your income. While it’s fairly simple to file a Chapter 7 bankruptcy case if you’re collecting unemployment benefits, it’s more difficult to file a Chapter 13 case. That’s because a Chapter 13 bankruptcy requires filers to have a regular source of income. Federal bankruptcy law requires that Chapter 13 filers pay some of their debts using their disposable income via a payment plan that lasts for three to five years.

If your only source of monthly income is unemployment benefits, it’s likely that you don’t have enough income to meet the minimum requirements of a Chapter 13 plan. If you file a Chapter 13 case without enough income each month to make the monthly payments under your Chapter 13 payment plan, the bankruptcy court can dismiss your case or convert it to a Chapter 7.

Other Considerations for Filing Bankruptcy While on Unemployment

Unemployment can make you vulnerable in a variety of ways. You might think that the only way to deal with a lack of income is to take on more debt. But this won’t work well as a long-term strategy if you plan to file bankruptcy. If you file a bankruptcy case while you’re unemployed, but you can’t find a job and you continue to take on new debt, you may find yourself overwhelmed with debt again in a few years, but you won’t be able to file bankruptcy again for eight years. 

This is why timing is an important consideration. You want to make sure that bankruptcy is your best option for both the short-term and long-term. Bankruptcy should be your last resort after trying other ways to reduce your debt and after considering other forms of debt relief. Remember, you want to use bankruptcy to get a fresh start, and then you want to make the most of that fresh start. If you file bankruptcy but quickly fall back into a hole financially, you won’t be using bankruptcy to its fullest effect. That’s because you’ll have already received a recent bankruptcy discharge without eliminating your problems paying debts.

When you’re unemployed, your benefits only go so far. They probably aren’t enough to pay all your living expenses every month. If your employment prospects are uncertain and you don’t know when you’ll be able to find full employment again, filing bankruptcy immediately after becoming unemployed may not be in your best interest.

If your lack of income causes you to take on new debt after filing bankruptcy, you won’t be able to eliminate this debt for at least eight years since federal law limits how often you can file bankruptcy. If you incur new debt immediately after filing bankruptcy but before you receive a discharge, you can’t discharge this post-petition debt in the pending bankruptcy case either. 

If you’re waiting to receive a large lump-sum payment of unemployment compensation, it may complicate your bankruptcy case. Once the funds enter your bank account, they’re considered cash on hand, which means they can’t be protected with a bankruptcy exemption. In effect, these funds become part of the bankruptcy estate in your case, which means they’re subject to creditors’ claims.

Remember, bankruptcy won’t help with any non-dischargeable debts like student loans and child support. But if you have a large number of medical bills after an accident or illness, bankruptcy could be your best option

Does Filing Bankruptcy Help if I Had an Overpayment of Unemployment Benefits? 

It’s not uncommon to receive an overpayment of unemployment benefits. If you do, you must repay it. Bankruptcy can help you discharge an overpayment of unemployment benefits. This is like credit card debt or any other unsecured debt that’s dischargeable in a Chapter 7 case. For more on the dischargeability of unemployment benefits overpayments, check out the article titled “Unemployment Overpayment & Bankruptcy” in the Upsolve Learning Center.

Let’s Summarize…

You can file Chapter 7 bankruptcy while unemployed. Other than the filing and credit counseling fees, you don’t need a lot of money or a bankruptcy lawyer to file. That said, timing is an important consideration. Unemployment puts you in a vulnerable position. Without a steady income, it’s easy to fall further into debt. Though living with mounting debt is stressful, you may want to wait to file your case. 

Remember: You can only file Chapter 7 bankruptcy every eight years.  So if you file bankruptcy too quickly, and you end up with debt problems down the road, you won’t be able to file again.

Carefully consider bankruptcy, as well as other non-bankruptcy debt-relief options, especially if you’re at risk of losing a valuable asset like a home or car. Consider talking to a local bankruptcy attorney about your options.