Loss of Income/Unemployment Protection

Loss of job or income is one of the most common reasons people file for bankruptcy. However, the kind of personal bankruptcy for which you are eligible may depend upon your employment status. While it is easier to qualify for and to file Chapter 7 bankruptcy if you lose your job, it may be more difficult to file or continue Chapter 13 bankruptcy proceedings without income. An experienced Los Angeles bankruptcy attorney can look at your particular income situation and advise you on whether bankruptcy is a good solution.

Effect of Unemployment on Chapter 7 Bankruptcy

Some people who file for Chapter 7 bankruptcy have significant assets and property not protected by exemptions. Their creditors may receive repayment once a trustee liquidates their assets. But most debtors who file for Chapter 7 do not have income that is high enough to prevent them from filing a Chapter 7. They also do not have more assets than can be protected under the law, so they can still file a Chapter 7 and keep all their assets.

In the latter case, most of a debtor’s debts will be wiped out without repayment to creditors. Therefore, to discourage people with too high an income from utilizing the bankruptcy procedures, the law requires you pass a means test to qualify for Chapter 7. If you are unemployed with no income, or only receive unemployment benefits, you are more likely to pass the means test than those who are employed and have high salaries.

If you do receive unemployment compensation, bankruptcy courts are split on whether to count this as income for purposes of the means test. The means test looks at your current income from the last six months prior to filing. However, it specifically excludes social security benefits. Since the federal government provides funding for unemployment systems through the Social Security Act, some bankruptcy courts consider unemployment insurance a social security benefit, while others do not. An experienced Los Angeles bankruptcy attorney can look at whether you need to include unemployment insurance income in your means test.

Effect of Unemployment on Chapter 13 Bankruptcy

The effect of unemployment on a Chapter 13 bankruptcy is more complicated. In Chapter 13, you are required to pay back all or a portion of your debts through a 3-5 year debt repayment plan. As a benefit of your agreeing to pay off a portion of the debt, Chapter 13 provides you with many tools to avoid losing your assets and property. For example, you are allowed to avoid foreclosure on your home, prevent vehicle repossession, or remove your second mortgage.

In order to continue to receive those benefits, you need to be able to pay the bankruptcy trustee every month. The trustee disburses funds to your creditors. Being able to file or continue to pursue Chapter 13 bankruptcy requires you to have income sufficient to make your monthly payments. This income is usually from a paycheck, but it could be from unemployment benefits, social security, or rental income.

You will have to prove to the court you are able to make the monthly payments to start or maintain Chapter 13 bankruptcy. If you cannot show that you are able to meet your monthly obligation through non-job-related income or find another job that allows you to make the payments, the bankruptcy court will dismiss your case.

Bankruptcy laws are complex. To the extent that you are unemployed or have other special circumstances, you should consult an experienced Los Angeles bankruptcy lawyer to assess your case. Contact Devin Sawdayi at 310-475-9399 or via our online form for help.