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The Law Offices off Chen & Tran - Bankruptcy AttorneysHow is social security income treated in bankruptcy?

Our Orange County bankruptcy attorneys at Tran Bankruptcy Law receive this question many times.  Social Security income in bankruptcy is treated differently from regular wages.  To explain how iit is treated, we first have to understand how regular income (wages) is treated in bankruptcy.

Income

Debtors must list their income in three section of the bankruptcy petition.  These places are Schedule I, the “means test” and in the Statement of Financial Affairs.  The calculation for your income is different in each of these places.  The two main sections are Schedule I and the means test.  I normally tell clients that these are two income tests for Bankruptcy.  The first test, that deals with Schedule I is the easy test.  The “means test” is the hard test.  If you pass the “means test” you are generally in a good position to file for bankruptcy without any income issues.

Schedule I income

Schedule I (and J) is your actual monthly income and expenses. The theory is that your expenses should nearly equal or exceed your monthly income. This is normally not a problem. If clients are looking into bankruptcy, it generally means that their their income is not high enough to meet today’s necessary expenses.

The income in this section should portray your current or projected average income.  To calculate this, the normal procedure is to take the average of all income you received in the last two months.  This INCLUDES your Social Security income.  There is a common misconception that debtors do not list social security income on the petition.  However, debtors must list social security income on Schedule I.  Again, so long as your income matches your expenses, you generally wont have a problem with this test.

Means test

The means test takes a 6 month average of your income and compares your income to the average income of the same household in your company and the necessary expenses of the average person.  The average income is taken from the Census Bureau and the average necessary expenses are taken from the IRS standards.

The theory is that the average person can live on the listed income and expenses.  Therefore, if a person makes more, then they shouldn’t qualify for Chapter 7 in most circumstances.  This is where Social Security income is different from regular wages.  The means test does not take into account social security income.  Therefore, if your only source of income is Social Security income, then you do not have to worry about the means test.

Statement of financial affairs

This is not necessarily a test.  However, you must list all income for the last three years in this section.  This includes Social Security income in bankruptcy.  Although, only the last three years of income is required, the Statement of Financial Affairs allows the trustee to see a snapshot of your life over the last ten years.

For further information visit our site at Tran Bankruptcy Law, your Orange County, Riverside and Los Angeles Bankruptcy Attorneys.