If you’re drowning in credit card debt, debt from medical bills, or if you have any other unsecured debts, then filing bankruptcy can help relieve some of the stress. However, if you’re also living on a fixed income that’s funded from Social Security benefits, you may be thinking about Chapter 7 and social security income. More specifically, you’re probably asking yourself, can bankruptcy take my social security benefits?
If you’re someone who depends on your social security check to pay your bills and fund your day-to-day expenses, it is perfectly normal to wonder how bankruptcy would affect you.
The short answer to the question is “no.” Federal law protects those with social security disability insurance, supplemental security income, and disability benefits, in general, when they choose to file for bankruptcy.
Chapter 7 and Social Security Income
While social security income does count towards “income” for federal tax filing purposes, it is not considered “income” for the purposes of bankruptcy law. Social Security, Supplemental Social Security Income, and Social Security Disability are typically protected during a bankruptcy filing.
During a Chapter 7 bankruptcy in Tuscaloosa, AL, almost all of your property belongs to the bankruptcy estate. This means that your bankruptcy trustee can take all of your nonexempt property and sell it in order to repay your creditors. While state and federal law does protect your disability benefits from the trustee, the extent of your protection depends on the source of the payments.
Types of Benefits and How They Affect Bankruptcy
Bankruptcy and Social Security Disability Insurance (SSDI)
Most of the time, debtors who are filing bankruptcy still need these disability benefits to support themselves and their family, and as a result, the benefits are protected.
So, as a general rule, both the Social Security Administration and bankruptcy laws protect your Social Security Disability Benefits (SSDI benefits) if you file for a Chapter 7 bankruptcy. If you receive monthly disability payments, in most cases, you’ll be able to keep those payments.
If you opted to have a one lump sum payment, then things may become a little more complicated. The bankruptcy trustee may accept a detailed deposit record that shows the lump sum payments came from the Social Security Administration. If he or she doesn’t accept the record, then you and your bankruptcy lawyer may need to take more steps to prove the money’s origin.
In certain jurisdictions, the trustee may be legally obligated to take the portion of your lump sum disability payment that exceeds the necessary amount for your standard care.
Bankruptcy and Social Security laws can be complicated. If you’re worried about how bankruptcy will affect your Social Security disability benefits, it’s best to speak with an experienced Tuscaloosa bankruptcy attorney before you file bankruptcy or move any of your assets.
Bankruptcy and Supplemental Security Income (SSI)
Supplemental security income, or SSI payments, are created to help those with disabilities care for their basic needs, such as food and shelter. Generally speaking, only those with little or no income will qualify for Social Security Benefits. Furthermore, the Social Security Administration has very strict regulations on what the disability benefits can be used for.
This means that most disability payments are exempt in Chapter 7 bankruptcy under federal law.
Disability Benefits from Other Programs
If you receive disability benefits from the state or a private program, you will not receive the same protection as those who receive payments protected by the Social Security Act.
Each state has its own form of bankruptcy relief exemption laws. And these laws allow a debtor to keep a certain amount of property when filing bankruptcy. The total amount of disability benefits you’ll be able to keep out of your bankruptcy estate will depend on the current exemption laws in Alabama.
Our experienced Tuscaloosa bankruptcy attorneys are standing by to answer any questions surrounding federal exemptions. We want to ensure that you have a good understanding before you make any decisions.
Social Security Income and the Chapter 7 Bankruptcy Means Test
A Chapter 7 means test essentially states that a debtor can only file for Chapter 7 bankruptcy if his or her total monthly income is below the average monthly income for a specific area.
However, for the purposes of filing bankruptcy, Social Security Disability Benefits are considered an asset, as opposed to an income. So, your Social Security disability payments don’t count towards the means test.
Commingling Social Security Disability Payments and Other Forms of Income
While your disability benefits don’t count towards your means test, this doesn’t ensure that you’ll automatically have exempt assets.
If you’re receiving disability benefits and you intermingled those disability payments in with other funds, such as payments from your job, your bankruptcy trustee may have a few questions. And, in worse case scenarios, a judge may determine that the commingled funds are not exempt assets.
In this situation, the bankruptcy trustee could take the money from your bank account or make you pay the money back.
The good news is that there are steps that you can take to avoid this issue.
Before you begin to start moving your money, you really need to speak with a bankruptcy attorney or debt relief agency.
If you receive monthly payments, it is wise to place those payments into a separate bank account.
It’s important to note that spending your money isn’t what causes the issue with disability payments and bankruptcy. The issue lies solely with the mixing of social security disability payments with your non-exempt income, such as wage income.
Chapter 13 Bankruptcy and Disability Benefits
When you file for a Chapter 13 bankruptcy, you typically get to keep all of your assets and property in exchange for the promise to pay the money back (either in part or in whole) through monthly plan payments. So, unlike a Chapter 7 bankruptcy, the bankruptcy trustee doesn’t sell your nonexempt assets or property to pay off unsecured creditors.
However, any and all nonexempt assets will increase the amount that you’ll need to pay back through your repayment plan.
If a judge decides that a portion of your disability benefits isn’t exempt during the bankruptcy proceedings, then you will need to contribute the amount towards your unsecured debts, unfortunately.
Furthermore, you must disclose all disability payments, whether these are ongoing payments or a lump sum payment. Every single payment will be taken into account when it’s time to determine the estimated value of your monthly payment plan.
How Can I Protect My Disability Benefits in Bankruptcy?
If you’re receiving any type of disability payment, you really should keep those in a separate bank account. If you choose to commingle the different sources of income, then you’re putting yourself at risk for losing the protection provided to you by the United States Federal Government.
While there are no shortages of self help services available, when you cross the laws of bankruptcy with the laws surrounding Social Security benefits, the result is often a state of confusion, for most.
At Eric Wilson Law, LLC, our attorneys evaluate your case and let you know the best course of action for you, specifically. If you have any questions in regard to disability claims before you decide to file for bankruptcy in Tuscaloosa, Alabama, please call our office for a free and confidential consultation.