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If you receive Social Security benefits (SS), or Social Security Disability Insurance benefits (SSDI), you can’t afford to pay all of your bills, and you are contemplating bankruptcy, you need to be aware of how these benefits are treated in bankruptcy. But before we discuss how these benefits are treated you should consider whether bankruptcy is even necessary in your situation, or whether it is in your best interest. Before you determine if bankruptcy is right for you, it is important that you understand the different bankruptcy options.
There are two common bankruptcies for consumers, Chapter 7 and Chapter 13. A Chapter 7 bankruptcy is often referred to as a “Fresh Start” bankruptcy because it discharges (wipes out) most types of unsecured debt within about 90 days of filing bankruptcy (there are some exceptions to discharge, including most taxes, alimony/maintenance, child support, student loans, and most government debts and fines). Most people whose only source of income is SS and SSDI benefits, easily qualify for a Chapter 7 bankruptcy. Fortunately, this is generally the cheapest, quickest, easiest of the two bankruptcy options.
A Chapter 13 bankruptcy is often referred to as a “Wage Earner” bankruptcy. A Chapter 13 is usually a more complicated, longer, more expensive bankruptcy than a Chapter 7. If you file a Chapter 13 bankruptcy you will be required to file a “Plan” with the court, which proposes how you will pay back some, or all, of your debt, and how long you will take to pay that debt back. Federal law requires that you are in a Chapter 13 bankruptcy for a minimum of 36 months, and a maximum of 60 months. Because of this time requirement, if you are entitled to discharge any of your debts, that will not occur for 36 to 60 months. The Plan that you propose to the court must be approved by the court, and one of the criteria necessary to get approval of your Plan is that you must have enough income to pay all of your necessary monthly expenses, as well as your monthly Plan payment. Most people who are entitled to SS and SSDI benefits (and these benefits are their only income) receive an amount that is well below their monthly expenses, so qualifying for a Chapter 13 is generally not possible for someone who only receives SS or SSDI benefits.
Now that you have a basic understanding of the two bankruptcy options, you need to consider whether bankruptcy is the right choice for you. If your only income is SS or SSDI, generally you are protected from garnishment. Federal law (U.S.C. 42 § 407) prohibits most creditors from garnishing SS or SSDI benefits (a few exceptions to this law are for taxes, alimony/maintenance, child support, student loans, and some government debts). This means that if you don’t pay unsecured debts (including, but not limited to medical bills, credit cards, payday loans, personal loans, signature loans, repossessions, foreclosures, past leases, past utilities, most civil judgments) creditors cannot garnish your benefits for these debts. However, if you comingle your SS or SSDI benefits with funds you receive from any other source, you jeopardize the protection the law provides your SS or SSDI benefits. For example, if you have a joint account with a spouse, and you deposit your SS or SSDI benefits into that account, and your spouse deposits some other form of funds into that same account, it may be difficult for you to prove how much of the balance of that account is actually SS or SSDI benefits, and therefore creditors may be able to garnish the entire balance of that account (I highly recommend that you maintain a separate account ONLY for your SS or SSDI benefits, and that you NEVER deposit any other type of funds in that account. By doing this you significantly reduce the risk that your SS or SSDI benefits are garnished from your account.). So, you do have the option of simply not paying your creditors for these debts, and avoiding bankruptcy. The benefit to this option is that you don’t have to come up with the money to pay for a Chapter 7 bankruptcy, which will likely cost you $1000 to $2500, depending on your situation, the attorney you choose, and which part of the country you live in. When you are living on a fixed income such as SS and SSDI, this option may be very attractive. However, there are some negative consequences to this option that you should consider. Although creditors cannot garnish your SS and SSDI benefits, they are still able to attempt to collect the debt from you if you don’t file bankruptcy, which means they can harass you by calling or sending you letters, they can sue you, and they can force you to appear in court. Also, your credit will likely suffer substantially if you don’t pay these debts. If the stress of creditors attempting to collect debts from you is too much for you to handle, or if the negative impact not paying these debts will have on your credit score is something you would like to avoid, then a Chapter 7 bankruptcy may be your solution.
If you choose to file a Chapter 7 bankruptcy and you receive SS or SSDI benefits, these benefits are exempt under bankruptcy law. This means that you will not lose these benefits if you file bankruptcy. This includes lump sum payments, past payments, current payments, and future payments. However, it is important to note that this income is only protected to the extent that you can prove the money you have on hand, or in an account, came solely from SS or SSDI benefits. Again, if you comingle your SS or SSDI benefits with funds you receive from any other source, you jeopardize the protection bankruptcy provides your SS or SSDI benefits (this does not include any SS or SSDI benefits you will receive after your bankruptcy is filed – future SS and SSDI benefits are always protected from turnover in bankruptcy). To completely protect your SS or SSDI benefits from turnover in a bankruptcy, as I mentioned before, I highly recommend that you maintain a separate account ONLY for your SS or SSDI benefits, and that you NEVER deposit any other type of funds in that account. By doing this you significantly reduce the risk that you will lose SS or SSDI benefits in a bankruptcy.
To summarize very basically, if:
- Your only income is SS or SSDI benefits; and
- You can’t afford to pay all of your bills; and
- You aren’t bothered by creditors contacting you about your debts and/or suing you for those debts; and
- You aren’t concerned about your credit score: then
QUIT paying the debts that aren’t necessary to live (medical bills, credit cards, payday loans, personal loans, signature loans, repossessions, foreclosures, past leases, past utilities, most civil judgments), save your money, and don’t file bankruptcy.
- If the stress of debt collection and possible lawsuits bothers you; or
- You are concerned about your credit score; then
talk to an attorney about bankruptcy.
Please understand, the examples I have provided in this article are not exhaustive. Your situation may differ from the examples provided. All information contained herein is intended for educational purposes only and should not be considered legal advice. All information provided throughout this article should be considered general information, and specific applications may vary. It is always important that you talk to a qualified bankruptcy attorney and discuss your particular situation to determine whether bankruptcy is right for you, and if so, how the information I have provided herein will affect you specifically.
None of the information provided herein is intended to express or imply an attorney-client relationship.
The author of this article is a bankruptcy attorney with 20 years of experience, who, according to federal law, is considered a debt relief agency, and proudly helps people file for bankruptcy relief pursuant to the U.S. Code.