Debtors shouldn’t have to choose between collecting unemployment and filing for bankruptcy

Collecting an unemployment compensation check after being laid off from your job shouldn’t prevent you from filing a bankruptcy case if you need to, right?

Well, in the topsy-turvy underworld of consumer bankruptcy law, you just never know.

At issue is whether unemployment compensation should be counted towards the “means-test” that determines whether a debtor can file a chapter 7 case. If you have just been laid off from a relatively well paying position, the extra unemployment income could still put you over the limit, and out of bankruptcy.

If unemployment counts at all, that is.

Back in 2007, a bankruptcy judge right here in Massachusetts came to the rescue of debtors in this situation. Judge Rosenthal ruled that unemployment compensation was authorized by the Social Security Act, making it effectively a type of social security benefit. And since social security doesn’t count in means testing, unemployment doesn’t either.

But Judge Rosenthal retired last spring, and the views of other judges in the Massachusetts and New Hampshire area aren’t necessarily known.

I can tell you that at least three bankruptcy judges around the country have ruled the opposite way. They say that unemployment is countable towards the means test, because it is really a state benefit paid by state agencies mostly from state tax funds, and therefor is not really a part of social security after all. The judges who have ruled against debtors in this way are from southern Illinois, central Illinois, and Harrisburg, Pennsylvania.

On the other hand, a bankruptcy judge from the Cincinnati area agrees with Judge Rosenthal; so Ohio unemployment isn’t countable, at least in the southern part of the state.

So, five years after the enactment of the BABPCA means test amendments, we really have no good answer to a fairly basic and common question. A topsy-turvy world, indeed!

What to do? If you live in Massachusetts and are thinking of filing for chapter 7 bankruptcy, I would leave unemployment out of the means test equation for the time being. Until this debate percolates up to the Supreme Court, we may not have a definitive answer, but for now I would take an aggressive stand and file the case under chapter 7 if you really need the debt relief.


By Doug Beaton

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