How are Social Security Benefits Treated in Bankruptcy?

Many people depend on social security payments to be able to afford their basic needed living expenses. The Social Security Act of 1935, while originally intended to serve a financial safety net for those who needed temporary economic assistance, has become generally accepted as something that most seniors will depend upon after they retire.  This recognized dependence upon social security benefits by so many of our seniors is the reason why such benefits are given special protection under the law. 

    In bankruptcy, a debtor’s social security benefits are absolutely protected.  When a person files for bankruptcy, their property generally becomes part of the “bankruptcy estate.”  This is important in a chapter 7 bankruptcy case as it is the trustee’s job is to distinguish exempt property (property that is legally protected from being taken to pay creditors) from nonexempt property. The chapter 7 trustee must then take the nonexempt property to pay the debtor’s creditors, unless the debtor pays the trustee to keep the property, in which case the money paid by the debtor also goes to their unsecured creditors. In a chapter 13 case, the debtor’s property is not subject to being taken to pay creditors, but the trustee must still determine the amount (“value”) of nonexempt property the debtor has. This is because, in a chapter 13 case, the debtor must pay, at minimum, that amount to their unsecured creditors in their plan. 

    When considering a debtor’s social security benefits in a bankruptcy, one does not even have to determine whether the benefits are exempt or nonexempt. That is because the Courts have ruled that social security benefits are so protected under Federal Law, particularly 42 USC Section 407, that they are not even considered part of the bankruptcy estate. This is very important in a chapter 7 case, because the trustee cannot use these benefits to pay creditors. Social security benefits are so protected that it is irrelevant as to when the benefits are received (before or after the bankruptcy case is filed) or in what form (i.e. in individual payments or in a large lump-sum payment).  So long as the debtor’s funds can be traced to social security benefits, those funds cannot be touched by the bankruptcy trustee. The fact that social security benefits are protected is also important in chapter 13 bankruptcy cases. First of all, any funds the debtor possesses that is traceable to social security benefits will have no impact on the amount of money they need to pay into their repayment plan, as they are not “property of the estate.”  Second, social security benefits are not considered “income” for bankruptcy purposes. This means that the debtor in a chapter 13 is not required to use social security benefits to pay their creditors, even though they may still do so if they need to in order to be able to afford their plan payments. This concept that social security benefits are not considered income is also important for the fact that such benefits are not taken into account when determining whether the debtor has sufficient income to be required to be in a chapter 13, or whether they qualify for being in a chapter 7. 

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    This is a generalized discussion of how Social Security benefits are treated in bankruptcy. A person considering filing a bankruptcy case should first consult with an experienced bankruptcy attorney. See us at LifeBackLaw.com!