unemployed woman with debt

Can You Discharge Debt Through Unemployment?

By Derek Prosser

When you’re unemployed, it can be difficult for many to keep up with bills and day-to-day expenses. For that reason, many people make the difficult decision to file for bankruptcy. Since Chapter 7 bankruptcy requires that your income is beneath a certain threshold (the Chapter 7 means test), unemployment allows an opportunity to remove debt prior to finding new employment. (Generally, Chapter 13 is not an option during unemployment as a steady income is required.)

What is the Chapter 7 Means Test?

Under the Chapter 7 means test, your average monthly income for the six months prior to filing for bankruptcy is compared to the median income for a similar household in your state. You will automatically pass the test if your average monthly income was below this threshold. However, if your average monthly income is not below the threshold, you are not automatically rejected. If you find that after deducting your expenses from your income you lack enough money to make a meaningful payment to your creditors (through Chapter 13), you will qualify to have your debt discharged under Chapter 7.

When Would Chapter 13 Be Preferable?

While most unemployed individuals in debt will choose to file for Chapter 7 bankruptcy, Chapter 13 bankruptcy has its own benefits. Under Chapter 13 you can be assisted in figuring out how to reorganize your debts. For example, if you need to pay back non-dischargeable debts, such as child support arrears, Chapter 13 is usually preferable. 

Do the Unemployed Qualify for Chapter 13 Bankruptcy?

Most people who are unemployed don’t have enough income to qualify for Chapter 13 bankruptcy. That’s because, under Chapter 13 bankruptcy, you can propose a three- to five-year repayment plan in order to pay back some of your debts. There is a trustee who is responsible for collecting your payments and giving them to the proper creditors. Although Chapter 13 may not require you to pay anything towards unsecured debts (e.g. credit card bills, personal loans, etc.), Chapter 7 doesn’t require you to do this either – nor does it require you to create a repayment plan for your creditors. Chapter 13 also requires that debtors pay off certain debts in full: if they want to keep their house or car, they must repay all mortgage and car arrearages. They must also pay priority debts, such as child support arrears or tax debt, in full. 

So while it’s not impossible for those who are unemployed to qualify for Chapter 13, it’s unlikely. Anyone filing must prove to the court that they can afford to pay the required repayment plan under Chapter 13 before the court will approve of it. 

Toronjo & Prosser Law Helps Those Who Are Dealing with Bankruptcy 

It’s undoubtedly stressful to realize that you don’t have enough money, and even more stressful when you realize that filing for bankruptcy may be your best option. That’s why it’s so important to consult with a knowledgeable and experienced Dallas bankruptcy attorney. At Toronjo & Prosser, our qualified Texas Bankruptcy Attorneys can help you to navigate the process. To learn more or to schedule a free consultation contact us online or call us today!

About the Author
Derek Prosser understands that clients need help and need answers and that in order to properly address those concerns, clients need to deal with an attorney first and always, not just an assistant or paralegal.  By effectively counseling from the outset of a case, Toronjo & Prosser Law can anticipate and address potential problems before they arise, as opposed to when they’ve already surfaced (the “Counsel Later” approach), and, in the end, strive for a seamless representation.