In our last post, we began speaking about the impact of income in the way a debtor deals with burdensome debt. First of all, we noted, income affects whether a debtor is able to seek debt relief outside bankruptcy. We left off speaking about debt management plans.
In addition to what we mentioned last time, one important point that should be kept in mind about negotiating with creditors and working under a debt management plan is that the debtor must ultimately pay the full amount of the debt and, if a payment is missed, creditors often have the ability to terminate the plan. By contrast, in Chapter 13 bankruptcy—which also involves making monthly payments—the debtor receives protection from creditors’ collection activities and typically only pays back part of the debt owed to unsecured creditors. Fluctuations of income can, therefore, have a negative impact on a creditor’s ability to successfully complete a debt management plan.
When it comes to bankruptcy, there are a couple important ways income can have an impact. First of all, a debtor’s income affects his or her eligibility for Chapter 7 bankruptcy. Unlike Chapter 13 bankruptcy, Chapter 7 bankruptcy involves the liquidation of non-exempt assets in order to repay creditors. In order to qualify for Chapter 7 bankruptcy, a debtor must meet certain income requirements falling under the Chapter 7 means test.
Income also impacts Chapter 13 bankruptcy, but differently than in Chapter 7 cases. Chapter 13 bankruptcy involves looking at a debtor’s disposable income and coming up with a plan to repay creditors. The more disposable income a debtor has, the more he or she will be able to pay back creditors, and the better chance he or she will have of being able to keep up on mortgage payments and other costs
In future posts, we’ll say more about both the Chapter 7 means test requirements and how disposable income is determined in Chapter 13 cases.
