Is it Better to Be on Disability When Filing for Chapter 7 or 13?
- Many disabled individuals find themselves contemplating bankruptcy due to a loss of previous income, mounting medical bills and other financial hardships. While many disabled individuals find that disability influences the reasons and effects of bankruptcy, being on disability does not affect Chapter 7 or 13 proceedings. You file and go through the proceedings as would any other debtor.
- To qualify for Chapter 7 bankruptcy, you must pass a means test, which usually states that your income must be less than the average annual income in your state. If you receive disability and have no other source of income, you almost surely pass the means test. Chapter 7 clears all of your unsecured debts (such as medical bills and credit card debt) but not student loans, tax debt or any court-ordered payments (such as child support, alimony and criminal fines). However, Chapter 7 also liquidates all of your non-exempt property. If you have extensive assets, consider filing for Chapter 13 bankruptcy.
- The details of bankruptcy law vary by state so consult with a bankruptcy attorney. An important variation deals with exempt property. Some states allow those in a Chapter 7 bankruptcy to exempt personal possessions (house or other dwelling, car, clothes, jewelry, retirement accounts, medical equipment) up a specified dollar amount.
- If you have extensive assets (investments, property, collections) that are not covered by your state's exemption laws, file a Chapter 13 bankruptcy, which sets up a payment plan with your creditors. You can try to renegotiate and lower your debts, and your creditors must stop harassing you as long as you can keep up with the court-ordered payments. Chapter 13 usually helps debtors with a substantial and steady income; disability payments may not be enough to pay off your debts.