Can I File Bankruptcy If I Have a Job?

Having a job does not prevent someone from filing for bankruptcy. Employment income is a significant factor in determining the appropriate type of bankruptcy and how the process will unfold. Understanding how income impacts eligibility and the subsequent steps is important for anyone considering this path.

Eligibility and Income Considerations

The amount of income earned is a primary determinant in whether an individual qualifies for Chapter 7 or Chapter 13 bankruptcy. Chapter 7, often referred to as liquidation bankruptcy, is generally for those with lower incomes and involves the discharge of qualifying debts, while Chapter 13 requires a regular income to fund a repayment plan over several years.

To qualify for Chapter 7 bankruptcy, filers must pass the “Means Test.” This test compares a debtor’s average monthly income over the six months prior to filing to the median income for a household of similar size in their state. If the income falls below the state’s median, the debtor typically passes the Means Test and is eligible for Chapter 7. If the income exceeds the median, additional calculations are performed, deducting allowed living expenses and debt payments to determine if sufficient disposable income exists to repay unsecured creditors.

Chapter 13 bankruptcy, a reorganization option, requires debtors to have a stable and regular source of income to make payments under a court-approved plan. This income can stem from various sources, including regular wages, self-employment earnings, social security benefits, pensions, or even rental income. The repayment plan typically spans three to five years, with the specific duration often depending on whether the debtor’s income is above or below their state’s median income. Demonstrating consistent income is important for successful Chapter 13 filings.

Gathering Your Financial Documentation

Collecting comprehensive financial documentation is a necessary step before initiating the bankruptcy process. This includes specific records related to employment and income, used to complete the required bankruptcy forms and schedules.

Essential income documents include recent pay stubs, typically covering the last six months, and W-2 forms for the two most recent tax years. For self-employed individuals, profit and loss statements for a similar period, along with supporting bank statements, are required to verify income. Other proofs of income, such as commission statements, bonus information, or records of social security and disability benefits, must also be collected.

Federal income tax returns for the past two years are generally required for Chapter 7 filings, while Chapter 13 may require up to four years of returns. These documents help complete the bankruptcy petition, especially for calculating the Means Test to determine Chapter 7 eligibility. In Chapter 13 cases, this income documentation helps establish the debtor’s ability to make the proposed repayment plan payments.

The Bankruptcy Filing Process

The formal bankruptcy filing process begins with filing the bankruptcy petition with the appropriate court. This action immediately triggers an “automatic stay,” a legal injunction that temporarily halts most collection actions by creditors, including lawsuits, wage garnishments, and collection calls.

Before filing the petition, individuals must complete a credit counseling course from an agency approved by the U.S. Trustee Program. This mandatory session, typically lasting 60 to 90 minutes and costing around $50 (fee waivers are available for eligible individuals), aims to provide an objective analysis of the debtor’s financial situation and explore alternatives to bankruptcy. A certificate of completion from this course must be filed with the court.

The “341 Meeting of Creditors” usually occurs 21 to 50 days after the petition is filed. At this meeting, the debtor appears before a court-appointed bankruptcy trustee, and sometimes creditors, to answer questions under oath about their financial affairs. Debtors must bring photo identification and proof of their Social Security number to verify their identity. The trustee confirms the accuracy and completeness of the bankruptcy paperwork and identifies any non-exempt assets in Chapter 7 cases or evaluates the repayment plan in Chapter 13 cases.

After filing, and separate from the pre-filing credit counseling, debtors must also complete a debtor education course in personal financial management. This course, which typically costs around $50 or less, focuses on budgeting, money management, and responsible credit use. For Chapter 7 cases, this course must be completed and the certificate filed within 60 days of the first scheduled 341 meeting. In Chapter 13 cases, it must be completed before the final plan payment. Failure to complete this course can result in the case being closed without a discharge of debts.

Employment During and After Bankruptcy

Federal law provides specific protections against discrimination for individuals who file for bankruptcy while employed. Section 525 of the Bankruptcy Code prohibits governmental units and private employers from discriminating against individuals in hiring, firing, or other employment decisions solely because they have filed for bankruptcy.

In Chapter 13 bankruptcy, the repayment plan is structured around the debtor’s regular employment income. Plan payments are calculated based on a debtor’s disposable income, the amount remaining after necessary living expenses are accounted for. If a debtor’s income significantly increases during the three-to-five-year repayment period, the bankruptcy trustee may require an adjustment to the plan payments to ensure all disposable income is committed to creditors.

While federal law offers protections, bankruptcy is a public record and will appear on an individual’s credit report for seven to ten years, depending on the chapter filed. Chapter 7 bankruptcies typically remain on a credit report for ten years, while Chapter 13 remains for seven years. Employers, especially for roles involving financial responsibilities, may conduct background checks that include credit reports. However, a bankruptcy record in most cases does not directly prevent future employment.