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How income affects a person's eligibility for bankruptcy

People in Virginia who are drowning in debt may have a number of options, depending on their situation. However, if every bill comes with stress over how it can be paid, if collection agencies are calling daily requesting payment or if wages are being garnished, the fastest and most effective route to relief may be Chapter 7 bankruptcy.

The U.S. Bankruptcy Court explains that there is not a maximum amount of debt that can be erased through bankruptcy. There is an income limit, though. The court uses a means test to determine if a person qualifies to file Chapter 7. If a person makes less than the state's median income, he or she is eligible. A person whose income totals more than that amount will have to show that there is not enough money left over after paying expenses such as food and rent to pay the debts. 

FindLaw explains that qualifying income includes more than wages from a job. If a person is receiving interest or royalties, income from a pension, annuity payments or rental income, this must be included on the means test. Other forms of income that affect eligibility include the following:

  • State disability insurance
  • Workers' compensation benefits
  • Unemployment benefits
  • Child support
  • Alimony
  • Gross income from a profession or business

Although retirement income is counted as eligible income, Social Security retirement benefits are not counted, and neither are income tax refunds.

Even it turns out that a person has enough income left over after expenses to pay some debts, but not the full minimum amount owed each month, he or she may still qualify to file for bankruptcy. In a Chapter 13 bankruptcy, the debts are consolidated and the debtor makes a single payment to a bankruptcy trustee, who distributes that money among creditors. The payment amount is based on what the debtor has the income to pay.

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