To pass the means test, it is essential to accurately classify all income, especially when dealing with exempt sources like Social Security and disability benefits. These classifications affect how income is reported on the means test, eligibility for Chapter 7, and the calculation of disposable income in Chapter 13. In recent years, I’ve seen more cases involving clients whose income consists primarily of retirement funds—such as pensions, IRAs, or 401(k) distributions—which raises additional questions about how exempt income is treated under the Bankruptcy Code.
Confusion often arises when completing Schedule I, which requires disclosure of all regular income received, even if that income is excluded from the means test. Understanding how exempt income is treated matters because it impacts Chapter 7 eligibility and determines how disposable income is calculated in Chapter 13, which usually sets the amount of the debtor’s monthly plan payment. This post breaks down those distinctions and offers step-by-step guidance on how to properly report exempt income under both chapters.
Key Definitions: What Counts as Current Monthly Income?
11 U.S.C. § 101(10A) defines “Current Monthly Income” (CMI) as:
“the average monthly income from all sources that the debtor receives…without regard to whether such income is taxable income, derived during the 6-month period ending on…the last day of the calendar month immediately preceding the date of the commencement of the case.”
This definition of CMI applies equally to both Chapter 7 and Chapter 13 bankruptcies, forming the basis for eligibility. Under this definition, all sources of income must be included—including wages, business earnings, pension or retirement distributions (such as 401(k) withdrawals), regular contributions to household expenses from adult children or roommates, and divorce-related payments like alimony or maintenance—unless specifically exempted by statute.
Statutory Exemptions from CMI
11 U.S.C. § 101(10A)(B)(ii) explicitly excludes certain types of income from the calculation of Current Monthly Income (CMI):
Social Security Benefits
Benefits received under the Social Security Act (42 U.S.C. § 301 et seq.) are fully excluded from CMI, regardless of whether they are received as monthly payments or in a lump sum.
- OASDI – Old Age, Survivors, and Disability Insurance
(commonly known as Social Security retirement or disability benefits) - SSDI – Social Security Disability Insurance
- SSI – Supplemental Security Income (needs-based assistance)
- Survivor Benefits – Paid to children or spouses of deceased insured workers
- Dependent Benefits – Paid to children or spouses of retired or disabled beneficiaries
Payments to victims of war crimes or crimes against humanity
Payments to victims of terrorism, as defined by 18 U.S.C. § 2331
Military-related disability and death benefits: Monthly compensation, pensions, pay, annuities, or allowances under titles 10, 37, or 38, paid due to disability, combat-related injury or disability, or the death of a uniformed service member, are generally excluded.
There is a notable exception for medical retirements under Chapter 61 of Title 10: these payments are excluded only up to the amount the debtor would have received through normal (non-medical) retirement. Any amount received beyond the regular retirement entitlement is considered part of CMI and must be included.
What This Means for the Means Test
The exclusions above are very limited and strictly construed. If your income does not fall into one of the specific categories listed above, it must be included on both Chapter 7 and Chapter 13 means test forms (Forms 122A and 122C). The exempt status of income depends entirely on whether the statute expressly excludes it.so.
Schedule I: Reporting All Income
Schedule I serves a different function than the means test. It provides the court and trustee with a snapshot of the debtor’s actual current income at the time of filing. All regular income must be listed on Schedule I, even if it is exempt from the means test.
In Chapter 7
Every recurring source of income, including exempt income like Social Security, must be listed on Schedule I. If Schedule I shows significant income left over after deducting reasonable expenses, the trustee or a creditor may argue that it would be unfair or abusive to remain in Chapter 7. That could lead to a motion to dismiss or convert the case to Chapter 13.
While case law is sparse, courts may apply a common-sense approach: if the debtor’s surplus income is large enough to make Chapter 7 relief seem abusive, dismissal or conversion could follow.
Exempt Income on Schedule I in Chapter 13
Although Social Security income is excluded from CMI and disposable income under § 1325(b), it still must be disclosed on Schedule I. Courts may consider that income when evaluating whether the debtor’s plan is feasible. However, they cannot require the debtor to use it for plan payments, and declining to do so is not bad faith.
In In re Manzo, 577 B.R. 759 (N.D. Ill. 2017), the court confirmed that Social Security benefits are excluded from the bankruptcy estate and cannot be required for use in a Chapter 13 plan. While debtors are allowed to voluntarily use Social Security income to fund their plan, they cannot be forced to do so. A debtor’s decision not to contribute these funds cannot be treated as bad faith. The ruling reinforces that Congress intentionally protected Social Security income from creditor reach, and debtors cannot be penalized for relying on that protection.
The same conclusion was reached in In re Canniff, 498 B.R. 213 (Bankr. S.D. Ind. 2013), where the trustee argued that excluding Social Security income from the plan violated the good faith requirement of § 1325(a)(3). The court disagreed, emphasizing that statutory exclusions control. A debtor’s refusal to include exempt income in a Chapter 13 plan is not bad faith and cannot be used to deny confirmation. The good faith standard does not override the Bankruptcy Code’s express exemptions.
If you are forced to convert from Chapter 7 to Chapter 13 due to excess income shown on Schedule I, you can still propose a low-payment plan—often as little as $50 to $100 per month for 36 months—which, if confirmed, will allow you to receive a discharge while retaining the protections of Chapter 13.
The Growing Importance of Protecting Retirement Income in Bankruptcy
As America’s population continues to age, more bankruptcy cases will involve debtors whose primary income comes from Social Security. The statutory exclusion of these benefits from means testing and disposable income calculations will play an increasingly vital role in helping older individuals qualify for relief—whether through Chapter 7 or a minimal-payment Chapter 13 plan. Properly understanding and applying these exemptions can mean the difference between keeping or losing essential assets, or between dismissal and discharge. That’s why it’s important to work with an experienced attorney like Steven J. Grace, who knows how to navigate the Bankruptcy Code, protect your income and property, and help you get out of debt quickly and efficiently.
