Should I File for Chapter 7 or Chapter 13 Bankruptcy if I Am Unemployed?

When you are unemployed and have a lot of debt, your first impulse may be to file bankruptcy. While it may very well be your best choice, especially in terms of timing, consider some of these issues before rushing to file your petition.

Can Creditors Get Your Assets?

If a creditor sues you and gets a judgment, it has the power to garnish your wages, attach your bank accounts and seize other property. A judgment creditor probably can't take everything you own, though. 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 might 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. For example, a creditor cannot garnish your unemployment earnings because they are exempt.

What Happens If You Get a Job After Filing for Bankruptcy?

If you decide to file Chapter 7 while unemployed and are fortunate to find a job after filing, this will not usually result in a denial of your discharge. But 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 plan.

Non-Bankruptcy Options:

There are other options to bring your debt down while you are unemployed, if you cannot or do not wish to file either Chapter 7 or Chapter 13 bankruptcy, some other options you should consider, other than doing nothing, include: 

negotiating payment plans with your creditors, if your unemployment benefits can handle it selling or 

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).