Debt can be a crushing burden. Its cyclical nature makes it incredibly hard to escape, and interest rates cause balances to continually rise.
If you are unemployed, those problems are compounded. How is a person supposed to pay down their debt when they have no income?
Thankfully, there are processes that can help people eliminate their debt by restructuring their finances. Bankruptcy is a useful tool that many California residents can use to discharge their debts.
But what happens to your unemployment benefits if you file for bankruptcy?
How Does Bankruptcy Work
First, it helps to know how bankruptcy works. There are several chapters in the bankruptcy codes, including ones for businesses and individuals.
The chapter that is right for your situation will depend on several factors, including:
- Your income
- The number of people you claim as dependents on your tax returns
- The number and value of any assets you own
The Difference Between Chapter 7 and Chapter 13 Bankruptcy
In Chapter 7 bankruptcy, a person’s non-exempt properties are sold and the profits are used to repay creditors and discharge debts. 96% of all Californians who file for bankruptcy do not have any property that is subject to liquidation because: (1) there is no equity in the property; or (2) the property can be protected utilizing exemptions (laws designed to protect personal and real property in bankruptcy).
In Chapter 13, a person proposes a repayment plan based on their monthly income and expenses. The minimum repayment plan could also be determined if a person has equity in their property. If the plan is approved by the Court, creditors agree to accept these payments for 3 to 5 years and forgive any remaining debts.
If your monthly household income is less than the California state median, you are automatically eligible for Chapter 7. The current median income for a single-person home is $47,798.00.
This limit is raised with each additional member in a household. It also changes annually based on current figures, so check present guidelines before filing your bankruptcy petition.
If your monthly income is above the median, you will need to pass a means test to qualify for Chapter 7. If you do not qualify, you can file for Chapter 13 bankruptcy.
How Do Unemployment and Bankruptcy Affect One Another?
Some people have the mistaken belief that you cannot file for bankruptcy if you are unemployed. That is not true. Bankruptcy is available for any California residents who qualify, regardless of employment status. If you are unemployed, you must have some source of income such as pension or rental income to qualify for chapter 13.
Whether you file for Chapter 7 or Chapter 13, you will have to create an inventory of all your non-exempt assets. Under Chapter 7, these assets will be subject to liquidation. Under Chapter 13, the amount of non-exempt property you own will determine your monthly payments to your bankruptcy trustee.
Unlike other states, California residents cannot use the federal bankruptcy exemptions. Instead, there are two property exemption systems that taxpayers can choose from: System 1 (also called the 704 Exemptions) and System 2 (the 703 Exemptions).
Under both systems, unemployment income is exempt. This means that your bankruptcy trustee cannot seize your unemployment income.
In some cases, being unemployed can help you qualify for bankruptcy.
If you do not qualify for Chapter 7 bankruptcy right away, you may qualify after being without work for a time. If your income is initially too high to pass the means test, you may be eligible after several weeks or months without work.
Your unemployment benefits are considered income by the state, but most people make significantly less from unemployment than their old monthly salary.
You can pass the Chapter 7 means test by showing you do not have disposable income; subtract monthly living expenses (like rent payments, car payments, alimony, and other exempt expenses) from your unemployment income.
It is more difficult to qualify for Chapter 13 bankruptcy if you are unemployed. In Chapter 13, you must prove that you can make monthly payments towards your debts for 3 to 5 years.
A lack of steady income could make it difficult to prove that you can consistently repay your creditors. However, in this case, you may qualify for Chapter 7.
Still Have Questions? Get The Answers
Bankruptcy can be complex and filing alone leaves you vulnerable to mistakes. To ensure your petition for bankruptcy is accepted the first time, work with the Certified Bankruptcy Specialists at The Law Offices of Larry D. Simons.
We have helped Mission Hills and Riverside residents find relief from their debts. Contact us right now to see if bankruptcy can work for you.
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