If you've fallen behind on your regular bills due to a cut in income, significant medical expense, or other major event that dealt a seemingly unrecoverable blow to your personal finances, you may be wondering whether filing for bankruptcy is a viable option. However, if you rely on pension income to support yourself, you could be concerned about bankruptcy's effect on these payments. Here is more about the treatment of pension income in Chapter 7 and Chapter 13 bankruptcy to determine whether you'll be able to take advantage of this income if you do decide bankruptcy is the right option. 

How is pension income treated under a Chapter 7 bankruptcy?

A Chapter 7 bankruptcy allows those whose income and debt levels are below a certain threshold to liquidate and discharge all unsecured debts (like medical debt, credit cards, or personal loans). Secured debts, like a mortgage, auto loans, or other loans secured by a tangible asset can either be reaffirmed (a process that requires you to affirm you'll continue to make payments) or relinquished back to the lender and any deficiency judgment waived.

Fortunately, your pension is largely exempt from this process -- you shouldn't be required to give up or sign over any portion of your pension to the bankruptcy court, even if your monthly pension check is a substantial amount. In fact, because most retirement income is excluded as income for purposes of bankruptcy calculations, it's likely your pension won't even be considered when determining whether you meet the financial qualifications to file a Chapter 7 bankruptcy. To the extent your pension worries are preventing you from pursuing a Chapter 7 bankruptcy, you may want to speak to an attorney instead -- it's likely that these fears are unfounded, and a Chapter 7 may be able to provide you with the fresh start you need.  

How is pension income treated under a Chapter 13 bankruptcy? 

A Chapter 13 bankruptcy is somewhat different than a Chapter 7, and focuses more on organized repayment and consolidation of your debts than their discharge. During a Chapter 13 bankruptcy, you'll enter into a repayment plan and turn over a good portion of your monthly income to the bankruptcy trustee, who will make payments to your creditors on your behalf (often helping you negotiate more favorable terms in the process). Once you've paid off any debts that are required to be fully repaid by the end of the bankruptcy period, your case will be dismissed and you'll be able to go forward with a clean slate.

Although your pension won't have a direct impact on a Chapter 13 bankruptcy, you'll need to be able to prove to the bankruptcy court that you have enough income to make the required monthly payments on your plan; and because neither your pension nor withdrawals from other retirement accounts like IRAs or 401(k)s are considered "income" for Chapter 13 purposes, those who rely heavily on these types of sources may find they don't qualify for a Chapter 13 bankruptcy. If you believe that a significant portion of your monthly income is derived from sources that will be excluded by the bankruptcy court, a Chapter 7 discharge may be your better option. 

For more information, talk to an attorney like Thomas A Blake.