If you’re unemployed with significant debt your first impulse may be to file bankruptcy, but you should consider several issues before making a final decision.
Can Creditors Get Your Assets?
If a creditor sues you and gets a judgment they have the power to garnish your wages, levy your bank accounts and seize other property. With that said, a judgment creditor can’t take everything you own. State law protects some — or maybe even all — of your assets. These protections are referred to as “exemptions.” For example, a portion of your cash in bank accounts, car equity, and furniture may be exempt — which means a creditor can’t take them if you object. How much you can “exempt” depends on the type of property you have and how much it’s worth. Your state’s laws will tell you how much and what type of property you can exempt. If a creditor gets a judgment against you, you should figure out if your assets are partially or fully exempt. A judgment creditor can only seize nonexempt property. If all of your property and wages are exempt, then the creditor can’t take anything.
What If You Get a Job After Filing Bankruptcy?
If you decide to file Chapter 7 bankruptcy while unemployed and are fortunate enough to find a job after filing, this will probably not affect your bankruptcy. (Of course there are exceptions, such as if you barely passed the means test and will make significantly more money with your new job). On the other hand, if you file a Chapter 13, the change in your income could impact your Chapter 13 plan payments. This is because you are required to commit all of your disposable income into your chapter 13 plan.
There are other options to reduce your debt while unemployed. If you cannot file either Chapter 7 or Chapter 13 bankruptcy you should consider:
- negotiating payment plans with your creditors
- refinancing your home and using the proceeds to negotiate reduced lump sum payments to the creditors, or
- obtaining the assistance of your local consumer credit counseling service (Credit Counseling Service).
Why Bankruptcy Might Be The Best Option
To qualify for chapter 7 bankruptcy your income for the past 6 months must be below a certain threshold or you must pass the means test. Either way, it helps to have low income for the 6 month period before filing bankruptcy. Accordingly, now that you’re unemployed you may have an easier time qualifying for chapter 7 bankruptcy, whereas if you wait to file after regaining employment you may no longer qualify for chapter 7. Therefore, if you have significant debt that you cannot repay and are now unemployed you should receive a free consultation to learn more about your bankruptcy options.