If you’re like us right now, you’re stuck at home. It’s early April, and we’re feeling the pinch imposed by the coronavirus.
If you’re like many of the folks we know around town, you may also have just found yourself suddenly unemployed.
If you’re in debt, you may be wondering how being unemployed impacts your ability to declare bankruptcy. You may be wondering if you can afford to declare bankruptcy right now.
Well, it gets complicated.
First of all, deciding to declare bankruptcy isn’t something one does on the spur of the moment. You’re not Michael Scott from The Office, simply throwing your hands in the air and exclaiming “Bankruptcy!” It takes a bit of foresight and planning.
It often means talking to someone like us.
Bankruptcy isn’t some sort of immediate, stop-gap, emergency measure. It’s a practical and reasonable approach to provide relief for those who are facing seemingly insurmountable debt. It’s one that millions of Americans employ each year.
Secondly, the impact of your unemployment is going to depend on what sort of bankruptcy you’re contemplating.
There are two basic forms of bankruptcy used most often for personal debt: Chapter 7 and Chapter 13. Both forms help you get out from under debt, but they’re very different.
Chapter 7 is designed for those without a significant number of tangible assets. You probably rent rather than own your home. You likely drive an older vehicle. You might not have a ton of money socked away in IRAs and retirement funds. No silly things like stocks or investments (We joke. Saving for retirement through stocks and investments can be a wise choice). Chapter 7 offers a true clean slate, but it comes at a cost: It’s a liquidation, and any unexempt assets you do have can be sold to clear what you owe (there are certain assets that are protected). If you do own a home, and are in danger of foreclosure (or are behind on car payments and looking at repossession), then Chapter 7 is not your friend – it doesn’t allow you to “catch up” with a few simple payments.
Chapter 7 and Chapter 13 also require something called a “means test.” A means test outlines your debts and income to the courts, and the courts look at the average median income in the state, and then try to determine whether or not you’re above or below that. The means test also only applies to your personal debt – not debt incurred as a result of your business. If you’ve earned too much, you may not qualify. In this instance, the fact that you’re collecting unemployment may be in your favor. The means test is also known as a “CMI (current monthly income)” but it doesn’t include THIS month’s income, and with today’s uncertainty…
Chapter 13 is a reorganization of your debt. With Chapter 13, you have a reasonable income and can slowly pay off your debt, but you need some breathing room to be able to do it. Your attorney will likely work out a monthly payment plan to provide that breathing room to catch up with your most pressing obligations, like your house or car payment. However, while filing for Chapter 13 may allow you to keep your assets and personal property, a change in your income and ability to hit those payments (like suddenly being unemployed) may throw your status as a Chapter 13 filer into jeopardy.
Likewise, finding a new job may put your Chapter 7 status in peril. Now you earn too much.
So, you’re unemployed and have successfully declared bankruptcy. At least you have that monthly check to tide you over while you weather the storm and look for another job, right?
Virginia courts have found that unemployment benefits are somewhat like social security. And as we discovered while learning about student loans, your creditors can claim part of that benefit to satisfy your outstanding debt. The CARES Act and other legislation pending as a result of COVID-19 changes many of the rules, and it can be hard to keep it straight, we know.
Making sense of all this is difficult. We’ve been dealing with it for years, and learn something new every day. It also seems as if the rules change just when you think you’ve figured it all out. But there is a method to the madness, and we can help you figure it out.