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Job loss can be a financially devastating experience. While consumers file for bankruptcy for many different reasons, job loss is one of the leading causes of bankruptcy in America. Although there was an upswing of job creation in August 2020, payrolls are still short over 11 million jobs compared to pre-pandemic levels. By May, close to 39 million Americans filed for new unemployment claims. As Americans continue to struggle with job loss whether it is related to the pandemic or not, it also continues to put many consumers at risk for bankruptcy.
Chapter 7 bankruptcy clears your unsecured debt, which would include credit cards and medical bills. If you have no assets and were earning a lower income, this is the best option for you. This is because when you file for Chapter 7 bankruptcy your nonexempt property is sold to pay creditors. For those without assets and with lower incomes, you don’t lose everything and can keep your exempt property.
Loss of employment can make it easier to qualify for Chapter 7 and pass the means test. When you aren’t working, your household income drops, which means your average income may come in lower than your state’s median income. However, where it can be tricky for the unemployed is if you recently lost a higher paying job. Because the means test considers your income for the past six months, you might come in too high. As a result, you might not qualify for a Chapter 7 Bankruptcy. In this case your best choice will be one of two options: 1) delay filing for bankruptcy for a few months so that you see a drop in your average income and are more likely to pass, or 2) consider whether filing under a different Chapter of Bankruptcy.
If your income calculations show your income was too high to qualify, you then complete calculations to determine if your expenses are too high to pay your creditors. In this test, you subtract allowable expenses from your gross income. Calculations look at the money spent on a long list of items including taxes, mandatory income deductions, childcare, food, utilities, and other living costs. If the numbers show you won’t be able to pay your creditors once all these monthly costs are paid, you can still qualify.
Regardless of why you lose your job, even if you receive some form of a severance package, you are still faced with finding another job in a slowed economy. Keep in mind that filing for bankruptcy can impact your job search. While federal, state, or local government agencies can’t refuse to hire you due to bankruptcy, private employers don’t fall under the same rules. Therefore it’s important to consider all your options before you decide to file for bankruptcy following job loss.