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Do You Need a Job to File Chapter 7 Bankruptcy?
According to the Bureau of Labor Statistics, about 4.1% of Americans are currently unemployed. However, California’s unemployment rate is slightly higher than the national average, hovering around 4.3% as of February 2018.
Without a regular source of income, many unemployed Californians struggle to keep current on their mortgages, utility bills, credit card bills, and other expenses. For many families and individuals, a single medical bill or auto repair is all that stands between relative stability and total insolvency.
Fortunately, it isn’t necessary to struggle day in and day out just to make ends meet. If you are experiencing financial hardship due to job loss or prolonged unemployment, bankruptcy could be a potential solution.
While there are many types of bankruptcy, most cases fall into one of two categories: Chapter 7, also called “liquidation,” or Chapter 13, also called “reorganization.” Both provide debt relief, but through drastically different financial approaches. Therefore, unemployment may be an advantage in Chapter 7, yet a hindrance in Chapter 13. Our Rocklin Chapter 7 attorneys will begin by discussing Chapter 7 bankruptcy and unemployment. To read more about unemployment and Chapter 13, scroll down to the next section of this article.
You do not need a job to file for Chapter 7 in California. In fact, being unemployed can actually help you qualify for Chapter 7 due to a step of the bankruptcy process called “means testing.”
As the name implies, means testing measures (tests) your financial ability (means) to repay your creditors. If your household income falls below the California median income for a household of equivalent size – something which is more likely to occur if you are unemployed – you pass the means test and may therefore file for Chapter 7.
Because means testing considers your gross income over the past six months, it may be strategic to temporarily delay filing if the job loss occurred recently. If liquidation bankruptcy is appropriate for your situation, our Elk Grove Chapter 7 lawyers can help you determine the right time to file.
Can You File Chapter 13 if You Are Unemployed?
Technically speaking, you do not need a job to file for Chapter 13 in California. However, unemployment can become a major obstacle in Chapter 13, and could potentially prevent you from successfully completing the Chapter 13 process in Sacramento, Roseville, Elk Grove, Rocklin, or elsewhere in California. To understand why, you need to have some background about how Chapter 13 bankruptcy works.
In Chapter 13, debtors create a financial plan, known as a “reorganization plan,” with assistance from a Chapter 13 bankruptcy attorney. The purpose of the plan, which must be approved by the bankruptcy court, is to establish an agreement between you (the debtor) and the individuals or entities to whom you owe debts (your creditors). The plan, which lasts from three to five years depending on your financial situation, organizes your debts based on their importance, ensuring that priority debts, such as child support, and debts that are secured by collateral, such as auto loans, are the first to be repaid.
In order for a Chapter 13 debtor to continually stay current with his or her reorganization plan, which generally calls for monthly payments, the debtor must have sufficient disposable income – which is where unemployment can pose a problem. If the court determines that you lack enough disposable income to manage a reorganization plan successfully, you may need to file Chapter 7 instead. However, if you can demonstrate that you have adequate income from sources other than a job – for instance, Social Security benefits or money you’ve made by investing – you may be able to file Chapter 13 while unemployed.
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