How does bankruptcy affect Social Security?

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How does bankruptcy affect Social Security?


People who file for bankruptcy are required to tell the court about their sources of income, and how much money they earn each year. If the primary source of income comes from Social Security, then this will be exempt from the reach of creditors since, the court system considers and treats Social Security income differently from wages or salaries. Thus, if your Social Security benefit is your primary source of income, and you are interested in filing for bankruptcy, then you can benefit immensely by learning more about the legal implications of such a situation.

Protection from Seizure or Garnishment

For the most part, Social Security payments of all kinds are exempt from being touched by the court or by creditors. People who receive disability benefits, retirement payments, or other forms of this income source generally avoid their money being claimed by their creditors or by the judge or trustee overseeing their case.

Federal law recognizes that people who receive these payments need this money to live and buy basic necessities. It is therefore illegal for a judge to order that Social Security payments be seized or garnished by a creditor.

Some Exceptions to the Law

However, there are some exceptional circumstances where even Social Security benefits can be seized or garnished by a creditor. For instance, if a person owes back taxes, child support, or student loan payments, then the judge may be unable to protect that person's money.

Likewise, if people co-mingle their Social Security benefits in a bank account with other sources of income, such as alimony payments or dividends from investments, they risk having a lien put on their account and benefit payments. Rather than comingling their payments, they should put their Social Security checks into an account reserved just for that money alone.

Income Counted for Means Test

People who plan to file for bankruptcy today are often required to complete a means test to determine if they are eligible to file for a Chapter 7 case. Their attorney will more than likely use their Social Security income as a means to determine their gross annual income, and their eligibility for total discharge of most or all of their debts.

While their payments may be safe from being claimed by the court, there is a need to report this income so that the court knows that they are legally eligible to file for a Chapter 7 bankruptcy.

Protection of Assets

People who file for bankruptcy must declare all of their assets, including their cars, houses, and sources of money. The trustee or judge will then consider which assets they can keep, and which ones must be surrendered to the court.

Rather than risk losing assets to the court, people should hire an attorney to protect their money and their possessions. Their attorney's job involves protecting their Social Security and making it clear to the court that this money cannot be touched. Without an attorney by their side, people could have their income inadvertently claimed by the trustee or on purpose by unscrupulous creditors.

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  • Capitalism without bankruptcy is like Christianity without hell.

    - Frank Borman