Does Unemployment Income Count In a Bankruptcy Case?

Written by Aurora F. | Fact checked by The Law Dictionary staff |  

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Unemployment benefits seem to be the bankruptcy equivalent to the proverbial hot potato, slippery slope, floppy slimy fish. It is amazingly difficult to get one’s hands around it and hold on to it. Experts agree that in typical Federal fashion, Congress passed an update to the Bankruptcy law that simply made the task at hand more difficult to handle. The biggest, and believed to be the worst, change was the addition of the “Means Test”. This was intended to help figure out if a debtor could even be allowed to file for bankruptcy, depending on the debtor’s “means” of living. Experts and those who have experienced the Test agree that it is confusing, rather unyielding in the face of realities, and at times just plain unfair. Regardless, it exists, and it demands that the debtor wishing to file use it, and pass it.

One of the parts of the Means Test is what must be included in the Test figures, and what is exempt. Unemployment benefits is one the items the law calls out. However, the law is not concise in its handling of unemployment benefits for the Means Test. Plain old unemployment benefits are the substitute for lost income. By that idea, unemployment benefits are said to be included on the lists for Means Test. Yet, there is an item that the law calls out, and that is Social Security benefits received under the Social Security Act. One of these benefits is … unemployment benefits. It appears that the unintentional way to interpret this is that unemployment benefits must be consider as income and listed as such for the Means Test, unless the unemployment benefits are benefits under the Social Security Act, and, therefore, exempt from the listing requirement for the Means Test.

Since bankruptcy courts exist within the individual state jurisdictions, the state can legally refine Federal bankruptcy law within their state jurisdictions but neither supersedes Federal law, come before it, nor negate it or blunt it. What states will do is define things like unemployment benefits within the state’s law, and then apply it to the Federal law. Some states have done this, made hash of it, and further confused the issue. There is a lot of varied information available on the history to the revised bankruptcy law in the junior Bush’s presidency as well as how states have tried to handle, and fumble, interpreting the law.

Both Massachusetts, in 2007, and Illinois in 2009 did some interpreting and defining and a whole lot of confusing.

One interesting case had a person who sought to have unemployment overpayments discharged as a part of a Chapter 7 bankruptcy. The state filed for judgment on the basis that the overpayment was being collected by fraud. The petition for judgment was upheld. This brings out the point that honesty is the only policy in bankruptcy. Fraud or perjury brings a big heap of trouble on top of what is going on. A debtor does not really need to add to the chaos.

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