The U.S. Department of Labor reports that since December of 2007 the economy has shed more than eight million payroll jobs. The number of unemployed workers has surged from 7.5 million to 15.7 million, and 36 percent have been out of work longer than six months. Many struggling families are unable to meet their monthly financial obligations and are filing for bankruptcy protection. The American Bankruptcy Institute reports that 135,914 consumers filed for bankruptcy in October, and total bankruptcies are projected to exceed 1.4 million in 2009, the highest figure in four years.
The recession has forced bankruptcy courts to examine the effect of unemployment on bankruptcy cases. The most challenging issue is whether an unemployed debtor can qualify for a Chapter 7 case, or if the debtor must file a Chapter 13 repayment plan case. The touchstone for determining this answer is the bankruptcy Means Test, which makes certain presumptions about the debtor’s finances and projects the debtor’s ability to pay debts based upon a historical six month average. Failing the Means Test means that the debtor is presumed to be able to repay some of the debts during a Chapter 13 bankruptcy.
Calculating the six month average income can be tricky when dealing with a recently unemployed individual. First, income has usually sharply decreased and the actual present monthly income is considerably less than the six month average calculated by the Means Test. Fortunately, most bankruptcy trustees and judges are compassionate when a debtor has lost a job, and this presumption of repayment may be rebutted by evidence by the debtor of the involuntary reduction of income, actual current income, employment status, etc.
Second, the Means Test income calculation includes any bonus or severance pay received during the six month period prior to the bankruptcy filing. This additional money may result in an inflated and inaccurate income calculation. Again, the presumption of an ability to repay can be rebutted, but the trustee and the bankruptcy court will require detailed financial records regarding how this money was spent.
Third, unemployed debtors often receive unemployment compensation pay. How unemployment benefits are applied in calculating current monthly income under the Means Test differs from one jurisdiction to another. The issue turns on whether the unemployment compensation is a benefit received under the Social Security Act and is therefore excluded from a debtor’s income calculation. Some courts have held that unemployment compensation is a benefit received under the Social Security Act and are excluded from the debtor’s current monthly income. See In re Munger, 370 B.R. 21 (Bankr.D.Mass. 2007): In re Sorrell, 359 B.R. 167 (Bankr.S.D.Ohio 2007). Other courts find unemployment benefits are not excluded. See In re Kucharz, No. 09-81258 (Bankr. C.D. Ill. 10/28/2009); In re Baden, 396 B.R. 617 (Bankr.M.D.Pa. 2008).
If your family has experienced an involuntary job loss and are struggling to make ends meet, consider your options. An experienced bankruptcy attorney can explain how the bankruptcy laws may help you restructure your finances and live within your means.