Can VA Disability benefits be used as income in chapter 7 or 13 bankruptcy?

When you’re in dire straits and have nowhere to turn to get a good foothold on your finances, bankruptcy is sometimes the only way out. In 2011, 1.37 million Americans filed for bankruptcy. The bankruptcy waters are definitely murky. It’s easy to end up in over your head if you don’t know what you’re walking into. The assistance of an attorney is always advisable.

So, how does bankruptcy work? The two most common types are chapters 7 and 13. Chapter 7 bankruptcy is best suited for individuals and businesses that want to clear the decks and start over from scratch. This form of bankruptcy falls under the category of liquidation and requires the filer to sell off valuable assets to pay for any portion of their debts that they can before the rest of it is negated by the court.

Chapter 13 bankruptcy doesn’t wipe the slate clean. Instead, your income is used as a guideline for how much of your debts you are required to repay. From there, the filer offers up a repayment plan that is stretched out over several years, usually no more than five, to repay their debtors. There are certain stipulations required to file both of these forms of bankruptcy. If you make enough money that you could feasibly repay your debts, neither of these options will work for you. Chapter 13 bankruptcy filings aren’t an option for individuals who have debts that surpass current maximums instated by the federal government. This applies to both secured and unsecured debts.

For both chapter 7 and chapter 13 bankruptcies, income is a deciding factor. However, all income isn’t always included. For chapter 7, your income cannot be more than the median income for your family size in your home state. For example, the U.S. Census Bureau lists the median family income in 2014 for a family of four residing in Michigan as $75,960. If your household income, as a family of four, is more than that, you may not be eligible to pursue chapter 7.

A chapter 7 bankruptcy will not require you to give up your primary vehicle or home, because these are secured debts. Instead, you can give the lender the option to repossess or you can decide to keep making your regular payments. This only applies to secured debts. Pensions, damages collected as a result of personal injury lawsuits, welfare income, unemployment compensation, and social security are also exempt from being included as part of a filer’s income during chapter 7 bankruptcy proceedings.

For chapter 13, you actually want more income; the goal is to prove that you can repay your debts. Any monies received as award for being a victim of a war crime or act of terrorism do not count as disposable income. Neither does income from a spouse you no longer live with or social security income. Thus, veterans must include their VA disability payments as a form of income for both chapter 7 and chapter 13 bankruptcies.

 

Cite this page: Danielle Bosley, "Can VA Disability benefits be used as income in chapter 7 or 13 bankruptcy?," in PsychologyDictionary.org, April 5, 2016, https://psychologydictionary.org/article/can-va-disability-benefits-be-used-as-income-in-chapter-7-or-13-bankruptcy/ (accessed October 14, 2019).
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