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The loss of a job is one of the biggest factors that lead people to file for Chapter 7 and Chapter 13 bankruptcy. State and federal programs exist to assist people who have lost their job and are looking for a new one. When losing a job puts a person in such financial distress that they must consider bankruptcy, the question emerges as to whether or not unemployment benefits constitute “income” for the purposes of a bankruptcy case. The short answer to that question is yes, it is considered income. The answer can be more complicated, however, when applied to specific parts of the bankruptcy process, like the Chapter 7 means test.

California, like most states and the federal government, maintains a system of unemployment insurance (UI). Employers pay into the insurance fund, which is available to pay temporary benefits to qualifying former employees. In order to qualify for benefits, individuals must have lost their job through no fault of their own, such as through a layoff; must have received a minimum amount of wages during an earlier 12-month period; and must be physically capable of working, willing to work, and actively seeking work. The amount provided through these programs is usually not much, but it at least keeps people from losing any and all income.

The general rule in bankruptcy is that unemployment compensation received through state or federal UI programs is included in a debtor’s income calculations. Chapter 7 bankruptcy cases rely on a “means test” based on a debtor’s “current monthly income.” A debtor whose “current monthly income” is greater than a certain amount, determined by a rather complicated formula, is not eligible for Chapter 7 bankruptcy. 11 U.S.C. § 707(b)(2). Some courts disagree on whether this income calculation includes unemployment compensation.

Chapter 7 debtors must identify all sources of income on Form 22A. “Current monthly income” is defined to include most sources of income, but specifically excludes “benefits received under the Social Security Act” (SSA). 11 U.S.C. § 101(10A)(B). Social Security payments are inarguably excluded from the means test. Debtors are permitted to claim unemployment compensation as an SSA benefit on Line 9 of Form 22A by entering any amounts claimed as such in two boxes to the left of the columns for the debtor’s and the debtor’s spouse’s income.

The U.S. Trustee Program takes the position that “[u]nemployment compensation is not a ‘benefit under SSA’” and “opposes any entry in the boxes to the left of Columns A and B.” A few courts around the country have found, however, that unemployment compensation should not be included when calculating current monthly income. See, e.g., In re Sorrell, 359 B.R. 167 (Bankr. S.D. Oh. 2007); In re Munger, 370 B.R. 21 (Bankr. D. Mass. 2007). No California courts seem to have reached similar conclusions, so unemployment compensation most likely remains part of current monthly income here.

Bankruptcy attorney Devin Sawdayi has represented individuals and families in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcy cases since 1997, helping them to repair their finances with dignity and respect. To schedule a free and confidential consultation to see how we can help you, contact us today online or at (310) 475-939.

More Blog Posts:

California Bankruptcy Court Reviews Grounds for Dismissing a Chapter 7 Case for Abuse, Los Angeles Bankruptcy Lawyer Blawg, March 11, 2014

Understanding the Chapter 7 “Means Test”, Los Angeles Bankruptcy Lawyer Blawg, October 4, 2013

How Is Social Security Income Treated in a Chapter 13 Bankruptcy? Los Angeles Bankruptcy Lawyer Blawg, June 9, 2013