Unemployment and Bankruptcy

February 9, 2021

Unemployment and bankruptcy frequently go together.  A sudden drop in income can destroy a household budget, making it impossible to make debt payments.   Bankruptcy can quickly become the only viable solution for debt problems if a period of unemployment lasts months or even years.

Unemployment is the Highest Cause of Bankruptcy

In fact, unemployment is arguably the highest immediate cause for bankruptcy filings.   Any period of unemployment can make it extremely difficult to pay the bills.  Most people already have a very tight budget.  If income amounts change, payments on debts are usually the first bills that are not paid.  Even if the unemployment period is just a few months, it can be very difficult to get back on track.

Medical bills are probably the second-highest immediate cause of bankruptcy.  Unemployment and medical bills, though, frequently come together.  Unexpected health issues can easily cause periods of unemployment or reduced income.   Major health problems usually always take some kind of toll on earning capacity.  They add with them new large medical bills with even less money to pay them.

Being Unemployed Can Be the Perfect Time to File

Being unemployed, however, can be the perfect time to file for bankruptcy.   If you are unemployed, it may be easier to file a Chapter 7 case.   This is because the court takes into account your current income level when you file.   You usually need to be under the “median income line” for your household size to get into Chapter 7.  If a member of the household is unemployed, it can greatly increase the chances of getting into a Chapter 7 bankruptcy case.   In addition, you may be required to provide less documentation of your income if you are currently unemployed.

Unemployment benefits and filing bankruptcyOverpayment of Unemployment Income

Another issue in bankruptcy is related to unemployment income.   Sometimes people have been accidentally overpaid unemployment income.  They are then required to pay this unemployment back to their state government.

Generally, when you have been overpaid government benefits, the amount you owe back to the government will not be discharged in bankruptcy.  This means that in many cases, you will still be required to pay back any unemployment amount you owe.   If you were overpaid unemployment benefits, it is important to understand that you will still likely owe these amounts even after your Chapter 7 case.

Make sure to check out the rest of our website for more information on Chapter 7 and Chapter 13 Bankruptcy.

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