Unemployment is a leading cause of bankruptcy and is often the right answer for people struggling to pay bills while collecting unemployment. However, the Federal Trade Commission recommends that people try to avoid bankruptcy if possible. Bankruptcy ruins credit for years, making it tough or impossible to qualify for new credit at favorable rates. It could also make finding a new job difficult if the employer has rules against hiring new employees with serious credit issues.
Chapter 7 Bankruptcy
Some people collecting unemployment benefits find that it is a perfect time to file for Chapter 7 bankruptcy. Chapter 7 is the simplest form of bankruptcy because it eliminates unsecured debt such as credit cards in as little as three months. The biggest barrier to qualifying for some is income. Income limits are set by individual states, and usually only those with very low incomes qualify. People collecting unemployment benefits may qualify however, because their earnings are low. Bankruptcy officials use the previous six months of income to determine eligibility.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is not a possibility while collecting unemployment. Chapter 13 requires a payment plan lasting three to five years based on income. Unemployment benefits are temporary, generally lasting less than a year, even with extensions. As a result, the bankruptcy court will not accept temporary unemployment benefits as the basis for a Chapter 13 payment plan lasting up to five years.
Hardship Plans
People on unemployment should consider hardship plans before filing for bankruptcy. Hardship plans are available from various lenders and allow lower payments and interest rates over a temporary period. It is usually best to contact the lender about the hardship before missing payments, as the early notice shows a proactive stance on addressing financial problems.
Debt Settlement
Debt settlement is another alternative to bankruptcy for people collecting unemployment. Settlement allows resolving unsecured debts for around half the balance. People who can't afford settlements can try negotiating very small monthly payments with the card company or debt collector. In return for the regular payments, the debt collector agrees not to pursue legal action and offer a settlement when the debtor can afford it.
Counseling
Credit counselors approved by the U.S. Department of Housing and Urban Development can also help with unemployment and debt. The counselors are available in most communities, with referrals available from local charities such as the United Way or a local chapter of the National Urban League. The counselors specialize in debt management plans that require a commitment of about four years. During that time the agencies will negotiate with unsecured creditors and make monthly payments on the debtor's behalf. The plans require a monthly management fee.
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