FAQ: Social Security benefits and bankruptcy

Answers to common questions about retirement and disability benefits during bankruptcy

Are my Social Security benefits safe in bankruptcy?

Social Security benefits provide needed living expenses for people who are no longer able to work or have retired. As such, generally creditors are not able to garnish (take) the benefits away from you, like they could wages. The exceptions are for taxes you owe, unpaid child support and federal student loans. The majority of creditors, however, including credit card companies, utility companies, medical providers, and other creditors will not be able to touch your Social Security benefits.

Why file bankruptcy?

If you receive a portion of your income from Social Security benefits, it may make sense to declare bankruptcy to get yourself back in good financial standing by discharging some or all of your debt while retaining the income you get from Social Security benefits.

Once your bankruptcy is complete, you will again be able to start saving, open a checking account, and improve your credit score without fear creditors will seize your assets or engage in further harassing behavior.

Is Social Security counted as income when I file bankruptcy?

This question is important in deciding what kind of bankruptcy you will file, and how much you need to repay creditors. The answer largely depends on where you live. In Ohio, you do not have to count Social Security income in order to pass the "means test," which primarily determines if your assets and income qualify you for a Chapter 7 bankruptcy.

In addition, your benefits will not be counted as income under the "means test" when you reorganize debts under a Chapter 13 bankruptcy. In a Chapter 13, you repay some of your debt over a period of three to five years, based on your ability to repay. The lower your total assets and income, the less you will have to pay in monthly installments.

Social security income is only listed on your actual budget of income and expenses, but not on the "means test" under either chapter.

What if I have some of my benefits money saved?

If you have managed to put aside some money from Social Security benefits, then those funds could potentially be at risk in bankruptcy, although that is not always the case. If you have not comingled (mixed) your benefit amount with other sources of income, then you can argue persuasively that those funds should not be touched. On the other hand, if you mixed your benefits with other sources of income, such as wages and gifts, then it is possible the bankruptcy trustee will determine that it is impossible to determine what amount is derived from Social Security benefits.

The same is true of Social Security lump-sum payments, for example retroactive benefit payments for your disability claim. It is therefore important to always keep your benefits and your income separate. Consult an attorney promptly if you have any questions at all on this issue.

So what should I do?

Whether you should file bankruptcy depends on your individual circumstances. Ultimately, the decision will be yours, after you have obtained information about all of the legal and financial options available to you.

If you are considering filing bankruptcy or have more questions about the benefits bankruptcy can provide you, contact Debra Booher & Associates Co., LPA, to discuss your circumstances and individual concerns.