Exclusion of Income Received After Chapter 7 Filing

April 13, 2006

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Wages and other sources of income, including self-employment income, earned and received after the Chapter 7 bankruptcy action begins are excluded from the proceeding.

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Given this fact, a debtor who works on a contract basis (e.g., a building contractor) could postpone forming any lucrative contracts until after the proceeding commences. Similarly, where only one spouse works, planned employment for the other spouse should begin only after the action is filed. In these situations, it is better to wait until after the action is completed (not just filed), if at all possible, to avoid any allegation of fraud.

In fact, all assets earned and received after the proceeding begins are excluded from the bankruptcy, subject to the following exceptions:

property received through inheritance
property received as a result of a divorce decree settlement
life insurance or other death benefits

These assets are brought back into the bankruptcy action if they are received during the proceeding or within six months of the final discharge. Thus, if an inheritance were anticipated, the debtor should obtain a legal opinion establishing the inheritance, and then consider filing the action immediately so that the inheritance would be received after the six-month period. Similar timing issues revolve around divorce. There is generally little you can do about the timing of life insurance payments or death benefits.