When you file for Chapter 7 bankruptcy, you’re looking to protect your future. Part of that includes your future income.
Without a steady flow of money coming in after your bankruptcy, how can you possibly hope to rebuild your credit and your financial standing?
Thankfully, the bankruptcy laws protect your future income from the reach of creditors, the trustee, and the system as a whole.
Sometimes, that is.
Here’s what I mean.
The Bankruptcy Estate
When you file for bankruptcy, an estate is created. That estate consists of all of your legal or equitable interests in property at the time of the bankruptcy filing. That includes all property in which you have an interest, even if it is owned or held by another person.
All property in the bankruptcy estate is then taken by the bankruptcy trustee, except property that is considered exempt under applicable law, and sold. The proceeds of sale are then divided up for all of your creditors.
After-Acquired Property Not Part Of The Bankruptcy Estate
Note that the law provides that the bankruptcy estate is made up of property you own as of the date on which the bankruptcy case is filed. Property or money that you become entitled to after the bankruptcy case is filed is not part of the bankruptcy estate, and cannot be taken from you.
There are a few exceptions to the rule that property you acquire after filing bankruptcy is not part of the bankruptcy estate. Inheritances are the big exception, but most other things – even lottery winnings from tickets you buy after your case is filed – are yours and yours alone.
That includes future income. Any money you make once the Chapter 7 bankruptcy is filed remains in yours to keep, free and clear.
Chapter 13 Differs In Treatment Of Future Income
In Chapter 13, you’re committing to repay a portion of your debts over a 3-5 year period in exchange for not having to sell your non-exempt property. As part of that deal, you’re committing your future earnings to the control of the bankruptcy court. Therefore, future income in a Chapter 13 bankruptcy is treated differently. Creditors still cannot reach it, but you’re limited in what you can do with the money so long as you’re in an active Chapter 13 case.
Remember Dischargeability Rules
Not all of your debts are discharged at the end of a Chapter 7 bankruptcy case. If a debt is not discharged, that creditor still has the ability to come after you for the money after your bankruptcy is over. If the creditor sues you (or if it’s the type of debt that doesn’t require a lawsuit for enforcement, such as a federal student loan) then your future income is at risk. If you’ve got debts that won’t be discharged in a Chapter 7, it may make sense to go into a Chapter 13 to reorganize and restructure your debt payments. Doing so will help you repay the debts under court supervision rather than risking your future income.