How Filing for Bankruptcy Affects Social Security Income: What You Need to Know
Bankruptcy can provide a financial lifeline to people who find themselves in a bad debt position. It can be a way out, a fresh start from an economic standpoint if you find yourself in over your head with no apparent way out.
When you file for bankruptcy, certain debts can be discharged, which essentially eliminates them from your “balance sheet,” so to speak. Depending on what type of bankruptcy you file, and whether you qualify, this can erase debts that you are having trouble repaying.
At the same time, the bankruptcy court will analyze your ability to repay your debts using your income sources and other assets.
One major question that a lot of people have is whether Social Security benefits can be considered income in bankruptcy proceedings. Below, we will discuss this issue in more depth, as well as provide suggestions on how you can protect your assets in bankruptcy.
Understanding Social Security Benefits in Bankruptcy
Those who earn Social Security benefits know that this money is generally considered income. Every year, Social Security benefits have to be claimed as income on tax returns along with other typical income earned through a W-2 or 1099.
That being said, Social Security benefits are generally considered exempt assets. This means these benefits can’t be used in “means test” calculations when deciding how creditors will be repaid, if at all, in a bankruptcy case.
There is one major exception, though, which is important to understand. According to rules set up by the Social Security Administration, Social Security benefits will remain uncollectable from creditors as long as the funds aren’t commingled with other funds.
To protect your benefits, an experienced bankruptcy attorney will usually recommend setting up a dedicated bank account just for Social Security benefits. This ensures that they aren’t commingled with other funds and remain Uncollectable.
Bankruptcy Options and Social Security Income
There are two main types of bankruptcy that individuals typically file.
The first is called Chapter 7, and it’s known as a liquidation process. Through it, many unsecured debts such as credit card balances get discharged, with individuals being allowed to keep some assets that are determined exempt, such as vehicles and homes.
Social Security income is not included in the Chapter 7 means test, which makes it easier for individuals who receive it to qualify for Chapter 7 bankruptcy in some cases. However, the Courts are split and do not treat Social Security income the same as some Courts consider it income for the purposes of what a Debtor can repay in the bankruptcy case, while others consider non-income for the purposes of bankruptcy.
Chapter 13, meanwhile, is known as a debt-repayment plan or restructuring. It’s a way to come up with how to repay creditors in a more beneficial way to the borrower. In these cases, the debtor is able to retain all their assets while making repayments according to a plan established and approved by the court.
Protecting Your Social Security Income
There are special protections that apply to Social Security income, whether you file for bankruptcy or not. For instance, as long as you can prove that the funds in question are income from Social Security benefits, then a creditor doesn’t have the ability to force a bank to withdraw that money in order to pay an outstanding debt.
The easiest way to do this is to create a separate bank account that’s dedicated solely to Social Security income. This will make it easy to prove the source of the funds and ensure they remain protected in bankruptcy proceedings.
While filing for bankruptcy gives you some added protections in relation to income and assets, it doesn’t provide any extra income protection for Social Security income, and in-fact in some courts may allow that social security income to be used to repay your creditors.
If you have received past disability payments and/or disability back pay and haven’t spent all the funds, that money may be considered property of your bankruptcy estate. As such, it could be subject to distribution to your credits in Chapter 7 bankruptcy cases if not properly exempted.
The Impact of Bankruptcy on Social Security
Social Security benefits were created by the federal government to ensure that people were able to live a financially secure life as they age and leave the workforce. To this point, these benefits are shielded from creditors’ claims, which reflects the agency’s commitment to protecting the financial well-being of all beneficiaries.
Regular Social Security benefits are specifically excluded from being garnished by creditors, per federal law. However, unspent past disability payments that are mixed with other money may be pursued by a Chapter 7 trustee as it may be difficult to ascertain if they were actually social security funds.
That’s why it’s very important to understand how bankruptcy affects funds you may receive from Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) back pay.
Working with an Attorney: Understanding the Attorney-Client Relationship
Understanding all the pertinent bankruptcy laws and what applies to you can be challenging. That’s why it’s typically a good idea to advise with a trusted local bankruptcy attorney who has experience working in your state.
When you’re working with an attorney, it’s essential that you understand how the attorney-client relationship works and how that will apply to your bankruptcy case. By law, you’re allowed to work with as many as three attorneys so you can find the best fit for your particular case.
The attorney you choose should help you properly navigate the process of bankruptcy and ensure that as much as your assets as possible can be protected, including any Social Security income you receive.
During meetings with your attorney, you should come prepared to share sensitive and/or confidential information about yourself and your financial situation. This will help your attorney fully understand your situation so they can best represent you in court.
If you are in debt, you may start receiving marketing messages from local attorneys who wish to represent you. As with anything, though, it’s important to be cautious and do your research before you select an attorney to represent you.
Next Steps: Filing for Bankruptcy with Confidence
If you’re considering filing for bankruptcy, it’s very important that you understand how it will affect every aspect of your finances and assets, including your Social Security income. Since this can be complicated to fully understand if you don’t have experience, it’s best to consult with an attorney you can trust to determine the best course of action based on your specific situation.
Your attorney should walk you through the debt relief options that are available to you, including Chapter 7 and Chapter 13 bankruptcy and what each entails.
They will guide you through how separate trust funds are used to pay disability benefits and how that may affect your bankruptcy case. And they will also discuss how retirement benefits and other income may be impacted by bankruptcy.
By consulting with a trusted attorney like those at Babi Legal Group, you can ensure you understand all of these concepts before filing bankruptcy so you can put yourself in the best situation possible.
Our attorneys have more than 15 years of experience in bankruptcy, debt collection and debt settlement, and can provide you with the best advice that you can trust. For more information about how we can help you, contact us today.
