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What types of income are exempt from being considered in a bankruptcy case?

Public benefits excluded from income determination for bankruptcy

For people filing bankruptcy, the fear that their public benefits can be revoked or counted as an asset by the U.S. Bankruptcy Court is unfounded.

Unemployment payments are allowed to be exempt, as are social security payments, veterans benefits and public assistance - all for as much as an individual receives.

According to the BankruptcyLawNetwork.com, the practice of exempting certain government benefits was bolstered by a Massachusetts court decision in 2007, which determined that unemployment payments are derived from social security benefits and aren't counted as income in a bankruptcy case.

"This decision has widespread implications, since foster care, day care, and adoption subsidies as well as most forms of welfare [but not Food Stamps] are similar benefits under the Social Security Act," stated Massachusetts attorney L. Jed Berliner on the website.

As a result, such benefits are not included in the tally of income and expenses in a "means test," which measures debtors' income against the average for their home state. Legal experts point out that Chapter 7 filers usually don't earn above the median levels, and higher earners who do are more likely to file a Chapter 13 bankruptcy in which an individual will pay back creditors through a court-ordered plan over several years.

In addition, Social Security benefits based on both age and disability are not considered part of an individual's income when they are calculated for a Chapter 7 case, the most common form of personal bankruptcy. The "means test," a calculation of all income for the six months prior to filing, is used to determine the average income amount that the courts will consider, but cannot include Social Security payments.

However, there may still be ramifications to collecting Social Security while proceeding with a bankruptcy petition. When the court reviews debtors' ability to repay creditors, Social Security benefits are considered part of their monthly income weighed against their household expenses.

In the same way, those filing bankruptcy under Chapter 13, will have their Social Security benefits considered only to determine the disposal income from which they would be required to make their monthly creditor payments. Further, debtors who are collecting Social Security may be able to claim their benefits as an exempt asset. In any case, filing bankruptcy does not cancel or impact a debtor's right to receive the payments.

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