What Kind of Income Can I Use To Qualify For A Chapter 13 Bankruptcy?
When people file for bankruptcy, we tend to assume that the less money or income they have, the better (or at least, the easier it will be to get a discharge). To some extent that is true, particularly in Chapter 7 bankruptcy. But Chapter 13 is different. In Chapter 13, not only is having regular income a good thing, but if a debtor doesn’t have sufficient income he or she may not even be able to file for bankruptcy.
Why Income Matters in Chapter 13 Bankruptcy
Chapter 13 bankruptcy requires that the debtor have sufficient income to pay back creditors at least a portion of what they are owed. If the creditor is secured, such as with a mortgage or car payment, and the debtor wants to keep the secured property, the debtor will have to have enough money to make the regular payment plus pay off what is behind (the arrears).
Sometimes, the debtor may have property that he wants to keep. If that property has value and is not otherwise exempt, the debtor may have to pay to creditors the value of the property over the course of the Chapter 13 plan.
The bottom line is that Chapter 13 allows debtors to keep property, and allows debtors to discharge debt by paying only a fraction of what is owed, but to do all of that, the debtor nonetheless needs to have income.
What Income Counts?
So what kind of income counts? It used to be that the debtor had to be a wage earner—that is, that the debtor needed to have a regular income from employment. But through the years, the law has changed, allowing debtors to claim many different sources of income to show that the debtor can afford and pay off a Chapter 13 payment plan.
Courts generally don’t care about where the income comes from. Courts care more that the income is stable, consistent, and regularly received. All the law requires is that the debtor have enough regular income to pay a Chapter 13 payment plan.
Debtors can use the following sources as “income” to show they qualify for, and can pay for, a Chapter 13 payment plan:
- Spousal support after a divorce
- Social Security income
- Income that the debtor receives from his or her own business, including dividends if the debtor is a shareholder or member of an LLC
- Contributions from family
- Money earned from investments or pensions
- Commissions or bonuses, so long as they are regularly received
Debtors should be able to show verification of income and income sources to courts. Bank statements that may show the sources of income, or the amount earned, and that the amount is regularly received, should suffice.