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Bankruptcy court rulings differ on treatment of unemployment pay

A job loss could contribute to someone's decision in Kentucky to file for bankruptcy, which could trigger questions about the status of unemployment benefits during a Chapter 13 filing. Under that chapter of bankruptcy, a person must propose a payment plan that sends money to creditors for three to five years based on future income.

In some cases, courts have allowed people to exclude their unemployment compensation from income by claiming that it falls under the Social Security Act. According to Bankruptcy Code Section 101(10A)(B), any benefits overseen by the Social Security Act would not be counted as current monthly income for the purposes of calculating a bankruptcy plan.

Recently, a debtor in another state attempted to claim this exemption, but the court ruled that her employment checks would be counted as income. The exemption was denied because the state managed the benefits, and state laws determined who was eligible and not the Social Security Act.

When people choose to file for Chapter 13 bankruptcy, they are hoping to protect their property, such as a home or business, while agreeing to repay debts according to a plan approved by the court. An attorney could analyze the person's income and debts to see if a payment plan could be a viable solution. After the attorney helps the person assemble financial records, the attorney could prepare the court paperwork. Communications with creditors might also be taken over by an attorney who could manage negotiations with them while the payment plan is being developed. Once a plan is put before a court for approval, an attorney could explain the needs of the client and urge the trustee to accept the debt management proposal.

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