Should I File Bankruptcy After a Job Loss? Here's What You Need to Know

Key Highlights

• Filing Bankruptcy after a job loss is a smart strategy to help you get back on your feet.

• A bankruptcy attorney helps navigate the legal process, reduces stress, and helps secured a real debt relief.

• Filing bankruptcy can halt monthly payments and prevent creditor harassment, lawsuits, and wage garnishment.

• You must qualify for Chapter 7 based on your income, passing the means test, or special circumstances.

• Timing your filing after a job loss is important, especially if you’re unable to afford basics such as food and housing or expecting new a new source of income soon.

Benefits of Filing Bankruptcy After a Job Loss

Losing your job can create serious money problems and lead to significant debt. Even after landing a new job, many folks find that they're in so much debt that they're worse off than before they lost their job and there's no chance of getting back to where they were any time soon. Filing for bankruptcy provides real debt relief and gives you a chance at a fresh start by ending creditor harassment, preventing lawsuits and garnishment, and stopping negative reporting on your credit report.

Ends Creditor Harassment

Falling behind on your repaying your debt leads to seemingly nonstop phone calls, texts, emails, and letters from your creditors. It's overwhelming and leads many folks to avoid answering their own phone unless they know the caller personally. Applying for bankruptcy puts an end to this constant harassment by putting the automatic stay in place as soon as your case is filed.

The automatic stay orders all of your creditors to immediately stop all collection activities right away, which includes contacting you in any way to collect a debt.

Prevents Debt Lawsuits and Garnishment

Similarly, debt lawsuits and garnishment are also stopped in their tracks by the automatic stay.

This is helpful for avoiding being sued by debt collectors and pausing (or "staying") active lawsuits. In most situations, active lawsuits will be "nonsuited," or voluntarily dismissed, after you file bankruptcy.

And while many folks are familiar with the fact that wage garnishment isn't allowed in Texas (unless it's ordered by a court outside of Texas), it's pretty common for creditors to garnish bank accounts after they've sued you. Creditors who've obtained a judgment against you may also ask a court to appoint a receiver, which is a person who takes legal ownership of your property and gives your nonexempt property to the creditor who has the judgement against you until that judgment is repaid (this includes your bank accounts).

Stop Monthly Negative Reporting on Your Credit Report

Falling behind on payments to your creditors also damages your credit because every missed payment can get reported to the credit bureaus and stay on your credit report for 7 years.

While it's true that filing bankruptcy is also a negative remark on your credit report, it's not reported like a new bankruptcy every month. This gives you the opportunity to build good credit in the months after filing.

On the other hand, every time you miss a debt payment and it's reported to the credit agencies, your credit report is saying "for another month, this person is in debt that they cannot repay and they're still not credit worthy."

When you consider this, filing bankruptcy makes sense because the alternative--remaining in debt that you can't repay--is also damaging your credit month after month and preventing you from getting started on repairing your credit.

Qualifying for Bankruptcy When You’re Unemployed

Just because you suffered a job loss doesn't mean that you'll automatically qualify for chapter 7.

Among the factors to consider when thinking about filing bankruptcy after a job loss are what bankruptcy chapter (7 or 13) you qualify for and when (this will almost certainly change after a job loss and again when you find a new job) and whether things are stable enough for you to file now or if it's a better idea to wait a bit longer for things to stabilize before filing bankruptcy. Working with a bankruptcy lawyer is helpful because they'll help you understand your Current Monthly Income (CMI), the means test, and the special circumstances exception for filing chapter 7.

Current Monthly Income (CMI)

Your Current Monthly Income (CMI) is the most important factor when determining if you qualify for chapter 7 bankruptcy. You can calculate your CMI by adding all of the gross income you and your partner (if your married) received in the last six months, not counting the current month. After you've added all of your income together, multiply it by 2 and then divide by 12.

It's the only step you'll need to take to know if you qualify for chapter 7 in many cases, since you automatically qualify if your income is at or below the median income for a household of your size in your state. However, you should be aware that many jurisdictions also look at bankruptcy Schedule I and Schedule J to see if you have "too much" money left over after you pay for your basic expenses. Having "too much" income left over after paying your basic expenses allows the U.S. Trustee to argue that you should be in a chapter 13 bankruptcy because you have enough money in your budget to make a meaningful repayment to your unsecured creditors (this is where the means test may be helpful for your situation.)

You should also note that the median income threshold changes 2 to 3 times a year. You can check the current standards here on the website for the U.S. Department of Justice.  Refer to the image below before clicking the link. You'll want to scroll down until you see the white box shown in the image and then use the dropdown menu to select the current timeframe.

The Means Test

Maybe you're saying to yourself, but isn't calculating your CMI actually the first step in completing the means test? You're absolutely right, but we don't have to complete the means test if you qualify for chapter 7 based on your income, so the "means test" is often used to refer to the remaining steps that we have to complete if you don't qualify for chapter 7 based solely on your income.

The truth is that the means test is fairly complex and can be challenging to get right if you don't have experience with running it, but here's a high-level overview of what the steps in the means test.

Means Test Step	Key Details
Median Income Threshold	Compare income to state’s median for household size (this is determining your CMI as we reviewed above)
Allowable Expense Deductions	Reduce income using mandatory expenses like taxes, payments for secured debt, payments for debts to the government (back taxes), payments to catch up on secured debt you've fallen behind on, and childcare are the most common examples
Disposable Income Limit	Determines if surplus income enables creditor repayments. This leads to a calculation to see what percentage of your unsecured debt you could repay in a chapter 13 plan.

Emergency Chapter 7 Filing--Special Circumstances

A lot of folks researching about bankruptcy come across emergency filings and discover that it's possible to file immediately file a chapter 7 bankruptcy after a job loss. Unfortunately, this is an example where internet research doesn't necessarily lead to the right conclusion.

Although it's true that in some circumstance it's possible to file a chapter 7 after job loss even if your CMI is too high to qualify and you fail the means test. However, there are additional factors that you'll be required to prove before a bankruptcy judge will grant your discharge, and if you can't prove the additional steps then your case may be dismissed your converted to a chapter 13 instead.

Specifically, you'll usually be required to show that your loss in income is long-term or permanent. Most of the time this means showing that you've become seriously injured or disabled, and as a result are unemployable in any role that might pay you something in the range of what you were earning prior to the injury or disability. Another example, although less common, is when an entire job is eliminated everywhere in an industry (due to automation or, nowadays, AI) and the folks who performed that job have a very specific skillset that's not easily adaptable to a new job that could earn similar income.

Timing Your Bankruptcy Filing After Losing a Job

Knowing when is the right time to apply for the bankruptcy process after losing a job is crucial because qualifying for a chapter 7 often depends on when you file.

Should You File Immediately or Wait?

Loosing a job is devastating and you often feel the financial impact right away. However, as discussed above, you don't automatically qualify for chapter 7 just because of a job loss.

For folks who can file chapter 7 right away after losing usually can do so because the income they earned at their job would've allowed them to file a chapter 7 even when they were employed. These folks were often dealing with tight finances before losing their job even if they were still living within their means (they could afford to keep current on their bills but doing so required nearly all of their monthly income). The decision to file chapter 7 quickly to eliminate debt can be seen as a decision to avoid before falling behind on any payments, allowing them to stay current on their necessary expenses like food and shelter and eliminate all of the stress that comes with falling behind on debt payments.

Other folks impacted by job loss are in a situation where they didn't qualify for chapter 7 based on their income at their last job, and for them they'll usually need to wait several month before they can qualify for chapter 7. The time spent waiting to qualify can be challenging for sure, but you should continue looking for a new job and/or applying for unemployment in the meantime. Sometimes looking for new employment can result in a new job quickly and alleviate the need to file bankruptcy at all.

How a New Job Offer Can Affect Your Bankruptcy Case

A new job offer qualifies as an anticipated change in income within the next 12 months, and you have to report that on your bankruptcy petition when you file. In situations like these, someone may qualify for chapter 7 based on their CMI and means test and still get forced into a chapter 13 because their anticipated future income would disqualify them from filing a chapter 7.

This is a great example of why timing is so important and why it's a very good idea to talk to a bankruptcy lawyer early on when you begin considering whether to file.

Examples of When Bankruptcy After Job Loss Makes Sense

Bankruptcy filing after job loss can help people facing hard times find a fresh start. Below are just a few examples of common situations we see with clients filing bankruptcy after losing a job.

You Found a New Job but Can't Afford Your Old Lifestyle

Maybe you were able to keep things pretty stable while you were searching for a new job, but now that you're working again you're realizing that you just can't afford your basic necessities and continuing to repay your creditors. This is really common and one of the top reasons why we see folks filing for bankruptcy after losing a job.

You Found a New Job but Now Your Debt is Too High

This is another really common situation we see in our clients. Typically these folks stop paying on their debt while their unemployed and looking for work. They eventually manage to find a new job that pays them what they're worth, but when they attempt to begin repaying their debt they realize that their debt has skyrocketed due to fees, penalties, and interest and on top of that their interest rates have increased.

Often, but not always, these folks were doing okay and managing their debt responsibly before losing their job. That's usually why they manage to make it through unemployment without tremendous financial upheaval, but what they find when they start trying to get back on track repaying their creditors is that repayment is nearly impossible anymore due to the months of nonpayment and the punitive consequences forced on them by their creditors.

You're Meeting Your Basic Financial Needs but No More (Slow Job Search)

These folks are struggling to find a job that pays what they're worth, but they're able to meet their basic needs through the gig economy or part-time work, unemployment, or relying on family or savings. That typically means that they start falling behind on debt payments pretty soon after losing their job even though they can pay for housing, food, utilities, etc. Filing bankruptcy removes debt stress and allows them to focus on making ends meet and finding a new job that adequately compensates them for skills and experience.

Your Household is Down 1 Income Earner and Struggling

This is a common variant of the slow job search described immediately above. In this situation the household is still provided for by the spouse's income, but there's just not enough money leftover for debt payments after the necessary bills are paid each month. Filing bankruptcy can help bring some peace of mind into the home and provide the time and space to dig into finding a good job.

Chapter 13 Bankruptcy After Job Loss

Filing chapter 13 after job loss is often not a good idea and may not be possible. The primary requirement for filing a chapter 13 bankruptcy is that you have regular, predictable income, and if you lost your job then that's something you typically don't have. If you lost your job and are considering filing chapter 13 because you don't qualify for chapter 7 based on your income for the last 6 months, then you should consider waiting a bit longer until you qualify for chapter 7 (if you remain unemployed this will happen in a few months after job loss) or find a new job and can file a chapter 13 then.

Conclusion

Losing a job can rock your world and devastate your finances. Filing bankruptcy offers a legal, strategic move to help you recover and get back on your feet. It's important to time your bankruptcy filing correctly to ensure you get the full benefit of filing. Working with a bankruptcy lawyer who can guide you through the process and ensure that you get the help you need is a good way to secure your fresh start.

Frequently Asked Questions

Can I file bankruptcy if I’m receiving unemployment benefits?

Yes, you can file for bankruptcy if you get unemployment benefits. Filing bankruptcy on unemployment is common and there's no risk of loosing your benefits because of bankruptcy. Remember, if you're trying to figure out if or when you'll qualify for chapter 7, unemployment benefits are counted as income.

Will filing for bankruptcy affect my future job prospects?

The good news is that employers are prohibited from discriminating against current employees because of their bankruptcy. That said, future employers may decide not to hire you because you filed, although this typically happens in jobs that might require financial oversight or managing a budget.

What debts can and cannot be discharged after job loss?

The most common type of debt discharged in bankruptcy include credit card debt, medical bills, personal loans, payday loans, and personal loans. Debts such as student loans, child support, and certain taxes are not discharged in bankruptcy. Also, debts that are secured by collateral (mortgages, auto loans, etc.) are only discharged if you also give up the collateral (the home, car, or other property).

Does bankruptcy stop wage garnishment or creditor harassment?

Yes, filing bankruptcy stops wage garnishment and creditor harassment as soon as your case is filed.

Do I need an attorney to file for bankruptcy after losing my job?

You're not required to use a bankruptcy lawyer to file for bankruptcy after a job loss. However, everyone is in a unique financial situation and there are a lot of important considerations that you need to get right to protect yourself receive your discharge. An attorney who knows the ins and outs of the law and can guide you each step of the way.