What does it mean in practical terms if my income is exempt?

[grammaw13]

I’m new to this board, and I haven’t found my question discussed. Please forgive my ignorance. If my income is exempt, what does that mean if I was filing either 7 or 13?

[justbroke]

That a good but somewhat complicated question as it has different answers depending on Chapter 7 or Chapter 13.

Let's define current monthly income (CMI) as defined in the bankruptcy code. CMI is all income, regardless of source or tax-ability, received within the 6 months preceding the month in which you file a bankruptcy case. There are 3 exceptions; income from a Social Security program, Veteran's benefits (new for 2019!), and some obscure war-related exceptions.

Let's look at Chapter 13 first. Since Chapter 13 is 100% voluntary (no one can force you to file a Chapter 13 or file a Chapter 13 on your behalf), you are pledging your disposable monthly income (DMI) into your Chapter 13 plan. Think of Chapter 13 as a pay-to-play system. If you want to save your home then you may need to pledge all your income regardless of its exempt status**. The only thing which may help the Chapter 13, when it comes to exempt income, is that it could help put you in a 36 month plan rather than a 60 month plan.

Now, let's look at Chapter 7. Your income would be exempt from the calculation of CMI. Hence you would, if all your income is exempt, be able to qualify for a Chapter 7 discharge. If all your income is exempt and/or your non-exempt income is not enough to fund a Chapter 13, you would "pass" the Means Test.

** Please take note that this may differ by how the local district handles Schedule I/J calculations. On Schedule I you include your actual income (regardless of exempt status). If you show a lot of disposable income on Schedule J, some Trustee will argue that you need to contribute to the unsecured pool.

[grammaw13]

Thanks for the info. My income is 50 percent retirement SS and 50 percent exempt pension. I fall about 9k under the median household income for 3 in Illinois. I am wondering if my income, though exempt, could still be used to put me into a 13 as opposed to a 7.

My home is worth 90k, owing 80k. My car is worth what I owe and I plan to keep it. So I believe that my only assets are my income. I’m not planning bk, but I’m looking at options.

[justbroke]

I am wondering if my income, though exempt, could still be used to put me into a 13 as opposed to a 7.

That's the question for your specific district. Your pension may not be "exempt" when it comes to counting current monthly income (CMI) as defined by the bankruptcy code. There's a distinct difference in definition (and meaning) or exempt versus the definition of CMI.

For example, all Social Security benefits are exempt by law and are "excluded" from CMI by bankruptcy's definition of CMI. Whereas you could have a pension that is exempt either under federal or state non-bankruptcy law, but it's "income" for purposes of the CMI calculation! It's an important distinction which leads to much confusion. Unless your pension income is a veteran benefit or a social security benefit, then it's not "exempt" from being used in the calculation of CMI for bankruptcy.

In any event, since you're below the median income anyhow, it is likely that you would qualify for a Chapter 7. Most districts don't look to the forms -- or pay much attention to the "forms" -- for under-the-median income filings that are filing for a Chapter 7 discharge.

Since 50% of your income is an SSA benefit and you are still under the median, I don't see why any Trustee (or the United States Trustee -- UST) would seek to push you into a Chapter 13.

[grammaw13]

Thank you so much for your help! I’ll keep paying my debts as long as I can. Hopefully, bk won’t be necessary.

[grammaw13]

Hi again, I just thought of another question. Will my checking or savings account be frozen when I file. I have direct deposit.

[justbroke]

Hi again, I just thought of another question. Will my checking or savings account be frozen when I file. I have direct deposit.

It's a tough question. The only bank which we know could "possibly" freeze your accounts is Wells Fargo. Also, credit unions (CUs) could be problematic if you have demand deposit accounts (DDA's such as checking/savings) and credit products with them at the same time.

My suggestion is to never hold a DDA where you have credit products. . If you have a checking/savings at a bank where you have credit products, it is probably a good idea to move your checking and direct deposit to a different bank. I did this myself out of concern for what would happen. I was using a credit union and they still debited my checking account for payments! They quickly returned it after I scolded them, but I learned my lesson.

Others may have different experiences.

[grammaw13]

Thank you JB for your help. I sure appreciate your advice🙂