Can You File for Bankruptcy If You Have a Job?

Bankruptcy serves as a legal avenue for individuals seeking relief from overwhelming debt, offering a structured path toward financial reorganization or discharge. A common misunderstanding is that having a job automatically disqualifies someone from filing for bankruptcy; however, employment status does not prevent this. Being employed influences the specific type of bankruptcy an individual may qualify for and the overall process involved in seeking debt relief.

Eligibility When Employed

Employment and income play a significant role in determining eligibility for bankruptcy. For individuals considering Chapter 7 bankruptcy, a primary hurdle is the “means test.” This test evaluates whether an individual’s income is too high to qualify for Chapter 7, which typically leads to the discharge of unsecured debts without a repayment plan. The first step of the means test compares an individual’s average current monthly income over the six months preceding the bankruptcy filing to the median income for a household of the same size in their state. If this income falls below the state’s median, the individual generally passes the means test and may qualify for Chapter 7.

If an individual’s income exceeds the state’s median, the means test proceeds to a second step, which involves calculating disposable income. This calculation deducts certain allowable living expenses, such as housing, utilities, food, and transportation, from the individual’s income. The remaining amount is considered disposable income. If the disposable income, projected over a 60-month period, falls below a certain threshold, the individual may still qualify for Chapter 7. Conversely, if the disposable income exceeds a higher threshold or is sufficient to repay a significant portion of unsecured debts, Chapter 7 eligibility may be denied, and Chapter 13 might be the more suitable option.

For Chapter 13 bankruptcy, while there is no strict income limit like the Chapter 7 means test, employment income is integral. Chapter 13 involves a repayment plan, and a steady income is necessary to fund these scheduled payments over a period of three to five years. The ability to consistently make payments on the approved plan is a foundational requirement for Chapter 13.

Choosing Between Chapter 7 and Chapter 13

The choice between Chapter 7 and Chapter 13 bankruptcy largely depends on an employed individual’s financial circumstances, income level, and specific goals. Chapter 7, often referred to as liquidation bankruptcy, allows for the discharge of most unsecured debts, such as credit card balances and medical bills. For an employed individual, this option is generally available if they meet the means test requirements, indicating they do not have sufficient disposable income to repay their debts. Non-exempt assets, if any, may be liquidated to pay creditors, though many common assets are protected by exemptions.

Chapter 13 bankruptcy, known as reorganization bankruptcy, is often a more appropriate option for employed individuals with regular income who do not qualify for Chapter 7 or wish to retain certain assets. This chapter involves developing a repayment plan, typically spanning three to five years, where a portion of debts is repaid to creditors. The repayment plan is structured based on an individual’s disposable income, ensuring that the payments are feasible given their financial situation. Secured debts, such as mortgages or car loans, can often be caught up through the Chapter 13 plan, preventing foreclosure or repossession. This approach helps individuals protect assets like homes or vehicles that might be at risk in a Chapter 7 filing. Regular employment income is a cornerstone for a successful Chapter 13 repayment plan, enabling debtors to address their financial obligations systematically.

Required Information for Filing

Before filing for bankruptcy, an employed individual must gather a comprehensive set of financial documents and information. This preparatory step is foundational for accurately completing the bankruptcy petition and schedules.

• Income verification, including pay stubs for the six months preceding filing and W-2 forms for the past two years.
• Proof of other income sources, such as rental income, disability benefits, or pension payments.
• A detailed inventory of all assets, encompassing real estate, vehicles, bank accounts, retirement funds, and other personal property, with estimated values.
• A complete list of all debts, including credit card statements, loan agreements, medical bills, and any other outstanding obligations, noting the creditor’s name, address, and the amount owed.
• Documentation of regular household expenses, such as rent or mortgage payments, utilities, food, and transportation costs, to assess disposable income.

The Bankruptcy Filing Steps

The bankruptcy process begins with a mandatory pre-filing credit counseling course, which must be completed within 180 days before the bankruptcy petition is filed. This course, provided by approved agencies, helps individuals explore alternatives to bankruptcy and understand its implications. Following this, the bankruptcy petition and accompanying schedules, containing all the gathered financial information, are prepared and submitted to the bankruptcy court. This formal submission initiates the bankruptcy case.

• Once the petition is filed, an automatic stay generally goes into effect, temporarily halting most collection activities by creditors.
• A bankruptcy trustee is appointed to oversee the case, reviewing submitted documents and potentially requesting additional information.
• Within approximately 21 to 50 days after filing, the debtor must attend a “meeting of creditors,” also known as the 341 meeting, where they answer questions about their financial affairs under oath.
• For Chapter 13 cases, a repayment plan must be proposed and confirmed by the court, outlining how debts will be repaid.
• Before debts can be discharged, a second mandatory course must be completed.

Employer Notification and Job Security

A common concern for employed individuals considering bankruptcy is whether their employer will be notified and if their job security will be affected. Generally, bankruptcy courts do not directly notify an individual’s employer about the filing unless the employer is also listed as a creditor. If an individual owes money to their employer, that debt would be listed in the bankruptcy petition, leading to the employer receiving a notification as a creditor.

Federal law, specifically Section 525 of the Bankruptcy Code, prohibits governmental units from discriminating in employment solely due to a bankruptcy filing. This protection also extends to private employers, preventing them from terminating current employees or discriminating against them solely due to a bankruptcy filing. These protections do not prevent an employer from taking action based on unrelated performance issues or if the job requires specific financial responsibility not met due to the bankruptcy.