Unforeseen unemployment is one of the main reasons people file for bankruptcy, with unpaid medical bills coming in a very close second place. Very few people volunteer to be unemployed, and especially not if they have a lot of personal debt.
Becoming Unemployed
What typically happens is that a person loses their job, and then applies for unemployment benefits to help pay their bills until they get back on their feet.
The downside here is that your unemployment benefits will be a fraction of what you normally earned each month. If, for example, you earned US$5,000 in the last quarter while you were still employed, you would receive a weekly payment of approximately US$200 per week.
That’s obviously not nearly enough to pay for groceries, rent, gas, cable, personal loans, medical debt, etc. What happens next is that you go into arrears on your bills, and unless you can find a new job quickly, then bankruptcy becomes the only option available to you. Tens of thousands of people appear in bankruptcy courts each week for this exact reason.
Filing For Bankruptcy
In a way, being on unemployment benefit can work in your favor during bankruptcy, especially for a Chapter 7 filing. The court has to assess your income vs. your expenses vs. your disposable income as part of your petition, deciding if you’re eligible to even bring forward a petition in the first place. This is called a means test, and your personal circumstances will be compared to a state average.
If you find work and continue to claim unemployment benefits during your bankruptcy proceeding that’s often viewed as fraud. Part of filing for bankruptcy is that any extra money you earn during that period would go towards repaying your creditors the money you owe them as part of a Chapter 13 filing.
Chapter 7
If the court finds that your only source of income is your unemployment benefit payment, then there’s a very good chance that your debts will be fully discharged as you have no means of paying your creditors.
It\’s important to disclose any other forms of income you have beside your unemployment benefit, as failure to do so will be viewed as bankruptcy fraud.
Some states won’t allow you to file for bankruptcy immediately after losing your job, so your financial situation may need to deteriorate further before the court will accept your petition.
Chapter 13
The basis of this type of bankruptcy is that you agree to repay some or all of your debt as part of a repayment plan. The issue here is that if your only income is unemployment benefit, then it is unlikely you will be able to meet the terms of the court-appointed repayment plan.
You do have the option of filing for a Chapter 7 bankruptcy first, allowing you to keep your creditors at bay with an “automatic stay”. Then when your financial circumstances improve you can apply for a Chapter 13 filing, and hopefully the court will approve it.
What it comes down to is this: Your unemployment benefit will be viewed as “income” for the purpose of declaring yourself bankrupt. How your future income potential and other income sources are viewed within that is open to interpretation depending on the state you live in and the court itself.
That’s why it’s so important to get advice from a qualified and experienced bankruptcy attorney before making such an important decision.