Can Unemployment Benefits Affect Your Chances of Qualifying for Bankruptcy in California?

Millions of people have been laid off since the COVID-19 pandemic began peaking in April. However, some states have experienced greater effects than others as far as job loss. California, for example, has one of the highest unemployment rates in the nation. According to the U.S. Bureau of Labor Statistics, California had the fifth highest unemployment rate in June, with approximately 14.9% of the state’s workforce being unemployed. 

Those who have filed and been approved for unemployment benefits can expect an average of $450 per week up to 26 weeks (6.5 months). While not the worst benefit rate in the nation, California’s cost of living means the payout isn’t even enough to cover most residents’ living expenses, leaving many on the brink of foreclosure. Even worse, for the thousands of workers who have been collecting benefits since April and have yet to find new employment, that 26 week limit is right around the corner. For these reasons, many Californians are considering filing for bankruptcy.

How Unemployment Benefits Can Negatively Affect Your Chances of Being Approved for Bankruptcy

While most people who are familiar with the bankruptcy process understand that there are certain prerequisites that must be met in order to be considered a viable candidate, others are left wondering if it’s even possible to qualify if they are collecting unemployment. The short answer is yes. However, unemployment benefits may actually have a negative effect on a debtor’s qualifications. This is especially true when it comes to Chapter 7 Bankruptcy, which considers unemployment benefits as a form of income. 

Chapter 7 Bankruptcy, also known as liquidation bankruptcy, dismisses most debts (with some exceptions, such as child support or alimony, for example). Given the state of financial duress unemployed Californians are in at the moment, Chapter 7 sounds like the best option. However, in order to qualify, debtors must pass a “Means Test” and all sources of income, including unemployment benefits, must be listed. 

What Is the “Means Test”?

The Means Test is used to calculate whether or not the bankruptcy applicant’s income is above or below the state’s median income for their household size. The test evaluates the debtor’s monthly income over the past six months to determine their average monthly income. This figure is then multiplied by 12, and the total will be the annual income that will be used for the purposes of the Means Test. 

This may be good news for those who have been unemployed for longer periods of time. Unfortunately, those who have recently lost their jobs and received above-the-median salaries prior to being laid off may not be eligible to file under Chapter 7.

In reality, there are far more complicated factors at play than the Means Test alone. Those facing financial hardship should consult with a bankruptcy lawyer in California to review all their options.