Filing Bankruptcy Due to Unemployment or Disability
If you are or have been unemployed, underemployed, or on disability, bankruptcy could be of significant relief to you. Bills of all types go unpaid when not enough money comes in and at some point, something must be done to help you recover.
Bankruptcy is a way for you to take care of the old bills so that you can focus on the future and provide for yourself and your household anew. Being unemployed and having employment that is inadequate can be demoralizing and lead to a feeling of hopelessness.
However, bankruptcy can be a very powerful tool to help you put the past behind you and it is generally a much better idea to file a case before you become fully employed again. Frequently, people wait until they have a regular income again before considering bankruptcy and that can make getting a case approved much more difficult.
Chapter 7 Bankruptcy
Timing can be everything when considering bankruptcy. Waiting too long or acting too soon can dramatically affect the kind of financial relief you need and more importantly, whether you qualify for a Chapter 7 bankruptcy or not.
Chapter 7 bankruptcy allows you to eliminate certain types of debt, particularly credit card debt and medical bills. In return for the discharge of your debts, you may have to give up certain assets to partially repay your creditors.
Don’t be hesitant to consider your options. Contact one of our bankruptcy attorneys if you know you are in a bad situation from unemployment or disability if you suspect that you may need some financial protection at some point in the future.
Don’t be afraid to check things out now and then hope for the best in the future. There are many details to consider when filing a Chapter 7 bankruptcy and the sooner you know your options, the better things will be.
Chapter 13 Bankruptcy
While a Chapter 7 bankruptcy completely wipes out most unsecured debts (or secured debts, like a house mortgage or car loan if you are willing to give up the property), Chapter 13 is frequently used to pay back something to your creditors to the extent that you reasonably can do so. It’s a powerful bankruptcy, especially after unemployment or short-term disability ends and you are back on your feet.
When re-employed, you now have the ability to work your way out of debt, keep important assets (like a house or car) and still deal with your unsecured creditors that are just too much to handle, at least at one time. Commonly, after finding a new job and getting a paycheck, many people that were previously without income now find creditors coming after them and they threaten to garnish their paycheck or bank account. Right when you thought things were getting better, the bills of the past rear their ugly head.
A Chapter 13 bankruptcy might just be the right fix if implemented at the optimal time. Exiting unemployment and a short-term disability and back into a new job is great news and while bankruptcy isn’t for every situation, our attorneys can guide you through the strategy to success while avoiding the unseen dangers that may lie ahead.
Long-Term Disability and Bankruptcy
If you are (or have) received long-term disability, whether from Social Security or a private insurance company, there are many factors to consider if you are in too much debt. While some people may be considered “judgment proof,” meaning that your creditors really can’t do anything to harm you, there is frequently more to it than that and it cannot be emphasized enough that each case is unique.
Not all people on disability are financially protected and knowing whether a bankruptcy, be it a Chapter 7 or Chapter 13, would help solve the problem is a great question to ask our attorneys. The answers given will vary, but it is fair to say that many people are dramatically better off filing bankruptcy even while on (or are finishing) disability to protect their income and assets.
If you are unemployed, you can still file for both Chapter 7 and Chapter 13 bankruptcy. Being unemployed would not affect your ability to file a Chapter 7 at all. However, when filing a Chapter 13, you must have the ability to make monthly plan payments so being unemployed is not ideal unless you have another source of funding.
In both Chapter 7 and Chapter 13 bankruptcy, it is important to notify your bankruptcy attorney. While it will likely have no impact on your Chapter 7 filing, it could affect your Chapter 13 bankruptcy, and it will be important to discuss options with your attorney. Options in a 13 could include reducing your monthly payment, temporarily suspending it, or converting to Chapter 7.
Unemployment overpayments (unless fraudulent) are dischargeable in bankruptcy. Sometimes, the state Department of Labor pushes back hard (they may think that ANY overpayment is fraudulent) but that is simply not the case and there are many successful bankruptcies that wipe out overpayments.
Yes, but it is not ideal. Chapter 13 bankruptcy requires a monthly payment with the first payment being due within 30 days of your bankruptcy case being filed. Because of this, it would be necessary to have an alternative funding source until you are able to obtain employment. Examples of alternative funding could be from a contribution to the household from another party, social security, unemployment. The list of alternate funds is endless.
Yes! Filing bankruptcy does not affect your eligibility to file for unemployment.
Yes, unemployment benefits are counted as income in bankruptcy.
Often times, yes; however, it is best to consult a bankruptcy attorney to review your unique situation. Why? Because people filing bankruptcy must state whether they “anticipate” future income in the next year and what that amount may be. If you have a history of earning a significant income, then you’ll be more closely watched. A variety of circumstances come into consideration, such as health, family size, divorce, etc.
Social Security Disability and VA Disability benefits are not included in bankruptcy; however, all other types of disability are.
If you are receiving disability benefits, it is encouraged that these benefits are kept in a separate bank account without any co-mingling of funds. If you mix (comingle) different sources of income, then you may lose your protection.
Both Social Security and VA Disability benefits are exempt from the bankruptcy trustee; however, keeping these funds separate from all other funds is crucial to preserving their exemption. Other disability benefits may also be partially or fully exempt depending upon which state exemptions apply to you.
How does a creditor or trustee know if the money in a particular bank account is from SSDI, SSI, or VA Disability?
In most cases, Social Security Benefits and VA Disability benefits are a monthly direct deposit into a bank account. As long as no other funds are being deposited into the account other than the Social Security or VA Disability benefits, they are typically easily identified. The burden is on the debtor to prove/trace the funds. If you can’t reasonably prove it, then that is where problems arise.
Disability benefits are treated the same in both Chapter 7 and Chapter 13 bankruptcy.
Social Security Disability and VA Disability benefits are fully exempt as long as they have not been co-mingled with other funds in a bank account or if you can’t trace them to their source. Other disability lump sum payments are also partially or fully exempt, depending upon which state’s exemptions apply to you.