Thursday, August 11 2022


Generally not. Congress has always made it clear that Social Security benefits are exempt assets, meaning they can’t be used to pay creditors in a bankruptcy case.

There is, however, one important exception, potentially involving situations where Social Security benefits have been commingled with other funds, such as in a bank account where earnings from your job are deposited. To make sure your benefits are protected, bankruptcy attorneys recommend setting up an account just for them.

Chapter 7 versus Chapter 13

Bankruptcy is a process under federal law to reduce or eliminate debt when you can’t pay your bills and have tried all other ways to get back on solid financial footing. People who file for bankruptcy generally use Chapter 7 or Chapter 13 of the US Bankruptcy Code.

Chapter 13, also called a wage earner’s plan, allows people with regular income to develop a plan to pay off all or part of their debts over time (usually three to five years). Most importantly, Chapter 13 provides a way for people to keep property like a car or home and prevent creditors from garnishing wages while plan payments are being made.

A Chapter 7 case is a liquidation whereby the debtor’s non-exempt assets are made available to a trustee for sale and distribution to creditors. It does not involve filing a debt payment plan with the court, as in a Chapter 13 scenario.

Federal law specifically excludes some income, including Social Security benefits of all kinds, from being paid to creditors. Filing for bankruptcy automatically prevents creditors from garnishing your wages and Social Security payments, and the Social Security Administration (SSA) says it won’t honor court orders to turn anyone’s benefits over to a bankruptcy trustee.

Benefit income must be reported

There are ways your benefits could be involved in a bankruptcy filing, directly or indirectly. One is on your income report. Chapter 13 filing forms require you to take a “means test” to determine how your monthly income compares to the median income in your state. This calculation also determines the amount of disposable income you have and is ultimately used to set the monthly payments you will make to creditors.

You must include Social Security benefits on your income statement, on a Schedule I form, but are not included in the calculation of disposable income payable in Chapter 13 cases.

You must also list Social Security benefits on your Schedule I for a Chapter 7 filing, which are used to calculate your average monthly income and are applied to the means test that determines whether you qualify to file under this chapter. The purpose of the test here is to prevent people from filing for Chapter 7 bankruptcy if they exceed the income threshold to do so, which varies by state.

But in a Chapter 7 filing, the court may determine that past Social Security payments deposited into your bank account are part of the bankruptcy estate—that is, property you own at the time of filing—and can be distributed to creditors, especially if they’re commingled with other funds, like your wages, warns William L. Norton III, a Nashville bankruptcy attorney and co-author of the Norton Creditors Rights Handbook.

The problem does not arise in a Chapter 13 filing because the debtor keeps all the assets while making payments under a plan. In Chapter 7 cases, the bankruptcy trustee may take funds into a bank account for distribution to creditors.

Disability back pay could be affected

Similarly, while your ongoing disability benefits will not be included in your bankruptcy, a trustee in a Chapter 7 case can look for prior unspent disability payments and back disability payments that have been commingled with other money in an account.

People awarded Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI), the two benefits administered by SSA for people with disabilities, can receive lump sum payments if Social Security determines that they were medically qualified for benefits before their disability claims were approved. .​

If commingled, these retroactive payments could be considered property of the bankruptcy estate and distributed among creditors. Again, this situation does not apply in Chapter 13 cases because the debtor keeps the funds on deposit.

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