Short-Term Disability and Bankruptcy

Short-Term Disability and Bankruptcy: How Benefits Are Treated

If you are receiving short-term disability (STD) benefits and considering bankruptcy, those benefits do count as income, but they are treated differently than regular wages in important ways.

Short-term disability can:

• Reduce overall income

• Affect Chapter 7 eligibility

• Change Chapter 13 payment amounts

• Qualify as a hardship if income drops

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Is Short-Term Disability Income in Bankruptcy?

Yes. Short-term disability benefits are generally considered income, whether they are paid by:

• An employer plan

• A private insurance policy

• A state disability program

However, the amount and duration matter far more than the label.

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Chapter 7 and Short-Term Disability

Short-term disability often helps Chapter 7 eligibility because:

• Benefits are usually lower than wages

• Income averages drop

• Temporary income reduction is recognized

Filing while on STD can make Chapter 7 possible when it previously was not.

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Chapter 13 and Short-Term Disability

In Chapter 13:

• STD benefits are included in disposable income calculations

• Payments may need to be adjusted

• Feasibility may be questioned if benefits are temporary

If STD benefits replace full wages, a Chapter 13 plan may still work.
If benefits are minimal, Chapter 13 may be unrealistic.

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If You Are Already in Chapter 13

Going on short-term disability may qualify as a hardship.

Possible options:

• Payment reduction

• Temporary suspension

• Plan modification

Never stop payments without legal guidance.

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Key Takeaway

Short-term disability is income — but often lower, temporary income, which bankruptcy law is designed to account for.

 

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