Can My Social Security Benefits Be Taken in Bankruptcy?

You may have reason to believe that your current financial state makes you eligible for a Chapter 7 bankruptcy filing. However, you may worry that your Social Security benefits will be counted toward your total income, tip you over the median income for your state and family size, and ultimately disqualify you. Well, please continue reading to learn whether your Social Security benefits will be taken into account in your case and how an experienced Louisville, Kentucky Chapter 7 bankruptcy lawyer at Schwartz Bankruptcy Law Center can help protect this crucial income source at all costs.

Can my Social Security benefits be taken during my bankruptcy case?

In a Chapter 7 bankruptcy case, your assets are divided into exempt and nonexempt categories. Your bankruptcy trustee may be allowed to seize your nonexempt assets, sell them, and distribute their proceeds to your outstanding creditors. Contrastingly, your exempt assets are those you are allowed to keep and protect from such distributions. With that being said, federal law holds that your Social Security benefits are nonexempt assets.

Even so, you must disclose your Social Security benefits on your bankruptcy petition, as the bankruptcy code requires you to list all your income resources regardless of whether they are countable towards the Chapter 7 means test. Otherwise, you may be accused of hiding assets later on, or even attempting to commit bankruptcy fraud.

Also worth mentioning, these rules may not transfer over completely if you opted for a Chapter 13 bankruptcy case instead. It is up to you how you budget and whether you need or wish to use your Social Security benefits in your repayment plan. However, this additional income source may affect your countable disposable income and, subsequently, how much the court expects you to pay your creditors per month.

Under what circumstances can a trustee take my Social Security benefits?

Say, for instance, that you have been collecting Social Security benefits for quite some time now. Then, say that you have not been spending the full amount of these payments each month, but you are saving the remaining balance in one of your bank accounts. Well, your bankruptcy trustee may argue to the court that your prior Social Security benefits deposited into your account are part of your bankruptcy estate. Further, they may fight that this is part of the nonexempt assets in your overall bankruptcy estate that can be used to pay back creditors.

Or, say that the Social Security Administration (SSA) determines that you were medically qualified for Social Security benefits before your application was officially approved, and they send you a lump-sum payment. If this lump-sum payment is deposited into one of your existing bank accounts, your bankruptcy trustee may similarly argue that it can be used in your bankruptcy proceedings. This is generally because it might have commingled with your other funds and income resources that are already categorized as nonexempt assets.

Therefore, we encourage you, if you have not done so already, to open a separate bank account dedicated exclusively to your Social Security benefits. This gives your bankruptcy trustee little to no opportunity to claim it as belonging to your bankruptcy estate. We understand just how overwhelming all of this can be for you. So, if you have any remaining questions, please consult with a skilled Louisville, Kentucky consumer bankruptcy lawyer. The team at Schwartz Bankruptcy Law Center is willing and able to provide you with legal assistance in any capacity.