Bankruptcy and Losing a Job
- Federal law governs bankruptcy, which is a form of debt relief provided by the government through the United States court system. To start a bankruptcy case, you file a petition and related papers in the bankruptcy court. The court in which you file will depend on your county of residence. As an individual consumer, you can file a case under Chapter 7, Chapter 13 or Chapter 11, although individual Chapter 11 cases are rare.
- If you lose your job before you file bankruptcy, the income you earned during the six months prior to the month in which you file your case will still have an affect on your case. The court looks at that time period and takes an average of your gross income to determine if you qualify for Chapter 7 bankruptcy or if you must be in a Chapter 13 bankruptcy. In a Chapter 13 case, the calculation determines how long your case must be, and in some jurisdictions, how much you have to pay into the case. If you lose your job, talking to a bankruptcy attorney will help you determine if bankruptcy is a good step for you.
- If you have already qualified for Chapter 7 and have already filed, losing your job will have little effect on your case. Chapter 7 bankruptcy is a liquidation, intended for individuals with low income and high debts who cannot afford to repay their creditors. If you lose your job, your income is even lower than it was when you filed your case, which makes you an even better candidate. However, if you had originally planned to keep making your house payment or your car payment after your Chapter 7, you may need to rethink your position. In a Chapter 7 case, you can only keep your house or your car if you can afford to make the payments.
- Chapter 13 bankruptcy requires you to repay your creditors over a period of three years to five years. For a Chapter 13 case to work, you must have enough disposable income to fund your Chapter 13 plan, which proposes to repay certain creditors in a certain way. If you lose your job during a Chapter 13 case and you can no longer afford your plan payments, you may have to give up a house or a car to reduce the plan payment or convert your case to a Chapter 7 case. Individual circumstances are an important factor in how to proceed if this happens to you. Your attorney can review your circumstances and advise you about how you can make your case work or whether you should end it. You may not be able to convert to Chapter 7 if your job loss was recent or if you had a previous Chapter 7 within the past eight years, or you might be able to make your payment temporarily until you find another job.