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Bankruptcy is designed to help people get a fresh start financially, but for seniors, it is often the only way they can retire comfortably if they have a large debt load. The bankruptcy law has special provisions for the elderly who rely on their social security benefits to make ends meet. Even so, bankruptcy can be particularly hard on seniors, especially those who live in states with a low homestead exemption – they may find their homes at risk. But is their social security at risk as well?
As a general rule, social security and pension plan receipts are excluded from income available to pay creditors under federal bankruptcy rules. [1] This means that any Social Security, either old age or disability, will be safe from seizure during the bankruptcy period. Social security benefits are generally better protected during bankruptcy than prior to filing for bankruptcy.
One must undergo a “means test” which determines whether ones’ disposable income is low enough to file for Chapter 7 bankruptcy. If one’s monthly disposable income is too high, he or she will not be able to use Chapter 7 to wipe out their debts altogether and will have to use Chapter 13 to repay a portion of their debts. The means test deducts specific monthly expenses form one’s current monthly income to arrive at monthly disposable income. For purposes of the Chapter 7 bankruptcy, social security doesn’t count in the “means test” for Chapter 7 and it isn’t considered income used to determine the amount to repay unsecured creditors in a Chapter 13 bankruptcy.[2]
Before Filing for Bankruptcy
Before filing for bankruptcy, one’s social security cannot be taken by creditors to pay debts. Federal law prohibits assignment, levy, or garnishment of social security benefits, with some notable exceptions: child support or alimony, unpaid federal taxes, and non-tax debt owed to another federal agency, such as student loans. Up to 15% of one’s social security can be garnished under these circumstances.[3] However, this protection applies only to one’s social security benefit before it enters a bank account and before it becomes mixed, or comingled, with other money.
Once social security benefits are deposited into a bank account and are comingled with other funds, the law no longer affords protection. The reason for this is that it is often very difficult to pinpoint the individual sources of the funds in an account. To retain the identity of the funds, the owner should put social security benefits money into a separate account to which only social security benefits have been deposited, thus making it traceable directly to social security.
Filing for bankruptcy
Once one has filed for bankruptcy, creditors can no longer take any further action to collect debts. Actions such as garnishments are halted immediately. If an attachment has been made to a bank account before filing, the bankruptcy automatic stay ends the levy or attachment, thus protecting any social security funds in the account, whether comingled or not. However, because these rules provide an exemption for social security benefits already received, either in lump sum payments or saved from monthly allocations, it is best to have any income derived from social security put in a separate account, as comingling with other money risks the ability to exempt it under federal laws as it may not be directly traceable. If social security benefits are comingled with other sources in the debtor’s bank account, then the court is likely to consider it an asset, which can be distributed to creditors.
What about social security disability benefits? These are excluded counted as part of income in qualifying for a Chapter 7 bankruptcy but are counted in determining ability to make repayments for a chapter 13 plan. Disability benefits may keep one from being able to make repayments because of the prohibition against attaching social security benefits.[4] Since the laws governing these rules are rather complicated, it is best to consult an attorney in relation to them.
Once one has been discharged from bankruptcy, social security benefits will only be affected by secured debts like mortgage payments, and debts that are not dischargeable through bankruptcy.[5]
Bankruptcy and Social Security laws are complex and state bankruptcy laws must also be taken into consideration. Anyone contemplating bankruptcy should seek legal counsel from an attorney who is competent and experienced in both bankruptcy and Social Security law as to the timing of filing and steps to be taken to protect your social security benefits.
[1] http://www.eastwakebankruptcy.com/blog/keeping-social-security-benefits-bankruptcy Retrieved February 20, 2012
[2] Ibid
[3] http://www.filingforbankruptcyonline.com/resources/bankruptcy/exemptions/are-social-security-benefits-protected-from-bankruptcy Retrieved February 20, 2012
[4] Ibid
[5] Ibid
Photo courtesy of garryknight via Flickr