Bankruptcy and Your Income in Kentucky: What the Law Says

Bankruptcy can be an overwhelming process, especially when considering how it might affect your income in Kentucky. Understanding the laws surrounding bankruptcy and income can help you make informed decisions about your financial future. Below, we delve into the details of how bankruptcy impacts your income in the state of Kentucky.

Understanding Bankruptcy Types
In Kentucky, individuals may file for either Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy allows for the liquidation of non-exempt assets to pay off debts, while Chapter 13 enables individuals to keep their assets by creating a repayment plan over three to five years. The type of bankruptcy you choose will significantly impact how your income is treated during the process.

Income Calculations
When filing for bankruptcy in Kentucky, your income will be assessed through a means test. This test determines whether your income qualifies you for Chapter 7 bankruptcy or if you will need to file under Chapter 13. The means test considers your average monthly income over the last six months. If your income exceeds the median for Kentucky, you may not qualify for Chapter 7.

Exemptions and Disposable Income
In a Chapter 7 filing, certain types of income are generally exempt from liquidation. This includes Social Security benefits, unemployment compensation, and disability payments. However, any disposable income you have—meaning income left after basic living expenses—will be crucial in determining your ability to repay debts. In Chapter 13 bankruptcy, your disposable income is used to devise a repayment plan. This means your income after necessary expenses will impact how much debt you’ll be required to repay.

Effect on Employment Income
Your regular employment income is also considered during the bankruptcy process. While you can continue to earn income after filing for bankruptcy, it’s important to report any changes in income to the bankruptcy trustee. If your income increases significantly during the repayment period in Chapter 13, you might be required to adjust your payment plan accordingly.

Tax Implications
Bankruptcy can also have tax implications for your income. If you have debt that is forgiven or discharged in bankruptcy, it may be considered taxable income by the IRS. However, under the Insolvency Exemption, if your liabilities exceed your assets, you may not have to pay taxes on that forgiven amount. Consulting a tax professional can help you navigate these complex implications.

Conclusion
Understanding how bankruptcy impacts your income in Kentucky is crucial to making smart financial choices. Whether you qualify for Chapter 7 or need to enter a repayment plan under Chapter 13, being aware of how your income will be evaluated and managed during the bankruptcy process can help you regain control of your financial future. If you're considering bankruptcy, it's advisable to consult with a knowledgeable bankruptcy attorney who can provide guidance tailored to your specific situation.