Can You File Bankruptcy If You're Unemployed? Yes, But You May Want to Wait

Job searching? How bankruptcy can help fight effects of unemployment

Image Source: Flickr User Andreas Klinke Johannsen

Job loss and diminished income are common drivers of personal bankruptcy filings, but you may be wondering if you can file bankruptcy if you're still unemployed. The answer is yes, you can, but likely only Chapter 7 and not Chapter 13. But just because you can file bankruptcy right now while you're still jobless doesn't mean you should – it may be better to wait. Here are some aspects to consider.

Benefits of filing bankruptcy now

If you're in a line of work where your credit rating matters for your job – because of a security clearance, or you work in finance or securities where you need good credit – then filing bankruptcy now may be preferable. Bankruptcy wipes out credit cards and medical bills so that you only have to deal with your mortgage, car loan, and student loans while on unemployment and job hunting. Filing can protect your financial reputation during the job search.

Benefits of delaying a bankruptcy filing

If, however, you're in a field that is experience slow growth or stagnant hiring, and you're worried you'll be unemployed for an extended period, you may want to wait it out. Here's why. Many unemployed people fall behind on their bills, use credit cards to pay living expenses and rack up debts while job searching. Bankruptcy offers a clean slate, but if you clean the slate midway through your unemployment period, you can easily get back into debt and back where you were.

Benefits of filing a Chapter 13 then a Chapter 7

If you're facing foreclosure of your home or repossession of your vehicle and you can't afford a new car or moving right now, filing Chapter 13 can stop both of these actions. Filing bankruptcy buys you some time to find a new job and stop the dire collections actions you're facing. If you can't make your plan payments, the Chapter 13 will be dismissed, but may offer you enough of a break to get a job and pull your finances together. Then, once you get a job, you can refile Chapter 13 to catch up on payment or convert your Chapter 13 to a 7. Or you can file a new Chapter 7 if your 13 was dismissed. This strategy will get you a clean slate on your past due bills so you can make the most of your new job and your financial fresh start.

Bankruptcy can be used strategically to your financial benefit

Yes, bankruptcy is an option of last resort, but you needn't wait until you're at the end of your financial rope to exercise this legal option. In fact, it may be better to use it strategically to protect yourself during your unemployment. You want to avoid drastic actions like pulling money out of your 401(k) to pay bills. It may be better to max out credit cards rather than drain your retirement account.

Although interest rates can be high (21% or so), you will face a 10% IRS penalty plus tax withholdings of roughly 20% on an early 401(k) withdrawal. That's a 30% impact on top of all the interest you'll lose. Also, if your employer match isn't vested, you face the loss of matching funds that can be anywhere from 25%-100% depending on how your former employer matched. This is much worse than the credit card interest rate.

Instead, using a well-timed Chapter 13, Chapter 7 or a combination of the two can protect your retirement assets, your home and allow you to deal with the financial mess that unemployment can cause. To find out the best timing for a bankruptcy filing, consult with an experienced bankruptcy attorney to get their advice on using bankruptcy strategically to maximize the benefit and protect your assets from debt collectors.

To find out more about protecting your long-term financial future using a well-timed bankruptcy, contact the North Carolina bankruptcy experts at the law offices of John T Orcutt. Call +1-833-627-0115 to schedule a free consultation at one of our offices – we're in Greensboro, Raleigh, Fayetteville, Garner, Wilson and Durham. Ask about zero down bankruptcy specials when you call.