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Can I File for Bankruptcy Without Losing Unemployment Benefits?

Can I File for Bankruptcy Without Losing Unemployment Benefits?

How Bankruptcy and Unemployment Are Interrelated

Facing overwhelming debt can be a scary prospect made worse if you unexpectedly lose your source of income. You may be wondering how you will be able to manage your already mounting payments, and you may attempt to stymie that fear by applying for unemployment benefits as you search for new work. However, you might be fairly concerned if receiving unemployment benefits prohibits you from filing for bankruptcy, should that procedure become necessary.

We at Moore & Associates, LLC are committed to helping our clients understand all of their options when faced with a challenging financial situation. We can help you determine if you qualify for bankruptcy and evaluate if it makes the most sense for your case. Below, we will help break down the basics of how bankruptcy and unemployment can impact each other in this state.

Unemployment and Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also known as liquidation bankruptcy, can actually be particularly helpful to those presently on or considering applying for unemployment benefits. Chapter 7 is intended for those whose income falls below a rate set by the means test. Generally, this means your total annual income must not exceed the median for your household size.

What is important to understand, though, is that receiving unemployment benefits does not preclude you from qualifying for Chapter 7 bankruptcy. In fact, it may help you become eligible: If you do not qualify for Chapter 7 immediately after being unemployed, you might become eligible after your income naturally declines over several weeks or months.

It is also possible to more immediately pass the means test even if your income does not presently fall below the median income for your household size. Instead, you can prove you have no disposable income, calculated by subtracting living expenses (along with a few other approved, categorized items) from your gross monthly income. If you are presently unemployed, you are likely to have a very low or nonexistent disposable income, thereby passing the means test and qualifying you for Chapter 7.

Regardless of how you qualify, any awarded unemployment benefits are considered exempt assets in your Chapter 7 bankruptcy proceeding in the state of Kansas. Filing for or receiving unemployment does not disqualify you for Chapter 7 so long as you pass the means test, and you will not have to worry about liquidating any unemployment income.

Unemployment and Chapter 13 Bankruptcy

Generally, unemployment and Chapter 13 are tougher to mix. Chapter 13 bankruptcy is typically the option for those who do not pass the aforementioned means test for Chapter 7, because they have a steady source of income.

That reliable income is important, because, unlike Chapter 7, Chapter 13 bankruptcy is not based in liquidation. Instead, a bankruptcy court effectively refinances your debts into a single, achievable monthly repayment plan for 3-5 years based on what you can feasibly pay. To set the monthly repayment amount, you must establish your monthly disposable income (again, subtracting living expenses and a few other approved categories from your gross monthly income). If you make all of your court-ordered payments, any additional debt is discharged at the end of the repayment term.

If you are considering filing for unemployment due to a job loss, you likely are not going to have the steady income stream required to demonstrate disposable income. This means a bankruptcy court is unlikely to approve your Chapter 13 proceeding and might instead recommend Chapter 7, given you will now potentially pass the means test. There are exceptions, such as if you are procuring enough income from a rental property or real estate sale to theoretically fund your repayment plan.

Things get even trickier if you experience a job loss after you have already successfully filed for Chapter 13 bankruptcy and are in the midst of your repayment plan. Remember, your monthly repayment amount is rooted in your disposable income at the time of your filing, or when you were gainfully employed. It is not flexible and will not change on account of job or income loss.

Filing for unemployment and receiving benefits will not directly affect your ongoing Chapter 13 proceeding, but in most scenarios, you will likely be unable to continue to repay the necessary amounts. A bankruptcy court will typically dismiss your case in this situation, though you may be able to miss one or two payments if you can quickly find new employment, prove your new income, and get back on track before the case is dismissed.

Otherwise, your Chapter 13 bankruptcy will end prematurely, and you will not receive the debt discharge that makes the mechanism attractive. At this point, if you are still facing overwhelming debt, you might want to consider Chapter 7 bankruptcy, as you may now qualify.

Make Sure Bankruptcy Makes Sense for You

Bankruptcy has become a stigmatized concept despite all of the help it regularly brings debtors seeking a fresh financial slate. The prospect of simultaneously facing excessive debt and loss of income is a frightening scenario, but with the right combination of financial and legal tools, a solution can be found.

We at Moore & Associates, LLC want you to trust us to help find the best way to help you defeat your debt. Our experienced bankruptcy attorneys are committed to serving our clients and are happy to offer a free initial consultation. We can perform a preliminary review of your financial situation and help you understand your options, including whether either Chapter 7 or 13 bankruptcy might make sense for you.

Do not let debt get ahead of you. Call (913) 225-8330 or contact us online to schedule your free consultation today!

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