Illinois Bankruptcy Guide for People Who Have Lost Their Job



Losing a job can be a devastating experience for anyone. But, if you are living paycheck-to-paycheck, the loss of income is particularly scary and stressful.

Before you panic, take the time to assess your situation. Your obvious priorities will be food, shelter, utilities, healthcare, and transportation. Any savings or other income you have will first need to go to those expenses. Beyond that, if you have creditors harassing you for payments you cannot afford to make, bankruptcy may be a way to keep your home and car while you look for employment and work to get your financial situation back on track.

Here are answers to some of the most common questions people who have recently lost a job ask about filing bankruptcy.

#1. Can I file for bankruptcy immediately after losing my job?

The short answer is: yes you can. You do not need to be employed to file for bankruptcy. However, your unemployment could impact your case. For example, you cannot file a Chapter 13 bankruptcy unless you have a regular source of income. Even if you find part-time work, the court could dismiss your case if you do not have sufficient income to make your proposed plan payments. Also, depending on how much you made in the job you lost, you may not be able to qualify for Chapter 7 bankruptcy if you file immediately.

#2. What bankruptcy options are available to individuals who have lost a job?

There are two bankruptcy filing options you can explore after losing a job:

Chapter 7 Individual BankruptcyThis option eliminates all debt except non-dischargeable debts such as student loans, certain tax debts and child support payments. Chapter 7 is usually a desirable option for people who have lost a job because individuals with above-average income typically do not qualify for this form of bankruptcy. Keep in mind, there is a possibility that people who file Chapter 7 could lose property that was used to secure a debt, such as a home or car.

Chapter 13 Individual BankruptcyThis option restructures debt into a manageable debt repayment plan. Filers have the opportunity to catch up on their delinquent payments to secured creditors (e.g., car and home loans). Most debts to unsecured creditors (e.g., credit cards and medical bills) are completely discharged or settled for significantly less than is owed. Repayment is made to a trustee who then pays each creditor according to the repayment plan approved by the court. To qualify for this form of bankruptcy, however, you will need to have a regular source of income. Government benefits, including unemployment compensation, might provide you with sufficient regular income to qualify for a Chapter 13. You will need to work closely with your bankruptcy attorney to determine whether you have sufficient income to propose a realistic Chapter 13 plan.

#3. What is the bankruptcy means test and how is it impacted by a recent job loss?

The court uses the bankruptcy means test to decide whether you qualify to file under Chapter 7. If you want to file Chapter 13 bankruptcy, the court uses the bankruptcy means test to determine the amount you will pay to your unsecured creditors. To apply the test, the court averages your gross income for the six months prior to your bankruptcy filing, then compares that to Illinois median income for a household of your same size. If you fall below the Illinois median, you pass the test. If your income is above the Illinois median, the court will analyze your expenses to determine whether you pass. If you lost a high-paying job, it may be advantageous to wait a few months before filing bankruptcy to lower your six-month average. Talk to an experienced bankruptcy attorney to help you decide when it is in your best interest to file.

#4. I recently made some large purchases on my credit card. Should I wait to file bankruptcy?

Probably. Large purchases charged on your credit card within 90 days of filing bankruptcy could be disputed by your credit card company and make it more difficult to get them discharged. In particular, if you purchased luxury items or took a cash advance using your credit card, you may have to repay those debts if you decide to file within 90 days of making the charges.

#5. I am expecting a tax refund. Should I wait until I receive it to file bankruptcy?

It may be in your best interest to wait until you receive your tax refund to file bankruptcy. The court views your tax refund as an asset. As such, it may be used to repay your unsecured creditors. If you receive your tax refund before filing bankruptcy, you have the opportunity to use it for essential expenses like mortgage/rent, utilities, car payment, medical expenses, or legal costs associated with filing bankruptcy.

#6. Will filing bankruptcy hurt my chances of finding a new job?

Probably not. Filing bankruptcy does not automatically hurt your chances of getting hired. In fact, federal, state and local government employers cannot factor your bankruptcy into their decision to hire you.

Private employers, however, are not bound by the same rules as public entities. If you are applying for a job where you would be responsible for handling money (e.g. accounting, payroll, bank teller), a private employer could pull your credit report as part of their background check, learn about your bankruptcy, and decide not to hire you. Keep in mind that employers must first get your consent to obtain your credit report. When they do, that is an excellent time to have an honest conversation with the prospective employer to let them know you are moving forward after your job loss and filed bankruptcy as part of a larger plan to help you handle your finances responsibly.

#7. Can bankruptcy help me avoid foreclosure?

Yes, bankruptcy may be able to help you if you are facing foreclosure. If you opt to file Chapter 7 bankruptcy, your foreclosure could be delayed thanks to an automatic stay that will order your creditors to stop pursuing collection activities against you. Foreclosure will eventually proceed, but you will have more time to locate new housing. If you are filing Chapter 13 bankruptcy, your repayment plan can be structured to allow you to catch up on missed mortgage payments over the course of the repayment period, which could last five years. You must have sufficient income, however, to make your current mortgage payment throughout the repayment period.

#8. My spouse is still employed. Can I do a separate bankruptcy without including my spouse?

Yes, however, the court will take your spouse’s income into account when conducting the bankruptcy means test even if you do not file a joint bankruptcy. Also, if you and your spouse have joint debts, your spouse will still be responsible for paying those debts even though your “portion” of the debt may be discharged in the bankruptcy. In Illinois, medical bills incurred while two married people are living together are automatically considered joint debt. So, if you are hoping to discharge your medical bills (and certain other debts), you will need to file with your spouse.