Can You Lose Income After Filing a Chapter 7? Here's How to Protect Your Money

Protecting future income is a priority when filing bankruptcy

Image Source: Flickr User Rocky Lubbers

If you are considering filing a Chapter 7 bankruptcy to get free of overwhelming debt, you should know that, in some cases, income that comes in after you file could be pursued by your Trustee. Here's what you need to know to best protect your income and get the most complete debt relief from your Chapter 7 bankruptcy filing.

How income is determined for a Chapter 7

While the Means Test for Chapter 7 looks at your current monthly income (CMI), how it is calculated is not quite as it seems it should be. CMI would be more aptly called “current monthly income as determined by averaging your last six months of income.” So to calculate your CMI, you have to look at the last six months of:

• Regular wages
• Commissions or tips
• Overtime pay
• Bonuses
• Income from interest, rent, royalties, etc.
• Pension or retirement income (excluding social security)
• Workers compensation and unemployment
• Child support and alimony

You add up the last six months of these sources of income then divide by six to get your current monthly income that may be more or less than what is actually your “current” monthly income. It may seem strange, but that's the how the law works.

When the Trustee comes for your money after the fact

Generally speaking, the last six months of money you earned immediately prior to filing bankruptcy is what matters. But if you get a lump sum of cash after you file bankruptcy, the Trustee assigned to your case may come after it. Here are some examples and what you can do to protect your money while still getting debt relief.

• Example 1 – Suppose you're a real estate agent and have some houses listed just before you file Chapter 7. Then five months later, the houses sell and you earn commissions. In this scenario, you should be (likely) be able to keep the commission because all the work associated with that income was done after you filed.

• Example 2 – Supposed you work in sales and you are paid a bonus every six months. You file Chapter 7 and then three months later are paid your bi-annual commission. You will likely have to revise your CMI to include the share of commission tied to the three months of work prior to your filing bankruptcy. You may have to give up some of this money to your creditors if it changes your Chapter 7 eligibility.

• Example 3 – You worked for a company for a couple of years and then are laid off and receive a lump sum severance payment. You then file bankruptcy three months later. The severance would be included in your CMI, at least in part because it's associated with work you did in the six months prior to filing.

• Example 4 – You file Chapter 7, then three months later get a new job that comes with a lump sum signing bonus. That signing bonus should not be part of your bankruptcy or CMI since it is not associated with work you did in the months prior to your bankruptcy filing.

Timing is everything

Timing is critical when it comes to filing your bankruptcy. If you're trying to stop a foreclosure on your home, timing matters. And with your income, timing matters. You want your CMI to reflect most accurately your true earnings so that means if you had a one-time windfall that's not a regular occurrence, you might want to postpone filing until your income normalizes. You also want to ensure that you have an experienced and reputable bankruptcy attorney to handle your filing do that you get the best and most fair income under the rule of law.

Contact the law offices of John T Orcutt for a free consultation with a North Carolina bankruptcy expert. Call +1-833-627-0115 for an appointment in Greensboro, Raleigh, Wilson, Garner, Fayetteville or Wilson.