How Does An Indiana Bankruptcy Affect Social Security Benefits?

Most government benefits, like VA disability and Social Security benefits, come in the form of monthly payments, like income. Typically, bankruptcy exemptions don’t apply to income. But according to U.S. law, Social Security benefits are exempt assets. Regardless of what state exemptions provide, Social Security benefits are immune “from the operation of any bankruptcy or insolvency law.”

This immunity is very good news for many families. Households which heavily rely on Social Security payments also have access to all the benefits of bankruptcy. Section 362 of the Bankruptcy Code instantly stops foreclosure, wage garnishment, collection lawsuits, and other forms of adverse creditor actions. A Chicago bankruptcy lawyer also uses bankruptcy as an opportunity to renegotiate contracts, like home mortgage loans, and obtain better repayment terms.

Bankruptcy Exemptions

The Automatic Stay prevents creditors from seizing assets and selling them to pay your debts. Bankruptcy’s property exemptions prevent anyone else from doing the same thing. Indiana’s property exemptions are very broad. They cover a lot more than Social Security and other government benefits. Some examples include:

• House: State law shields up to $19,300 of home equity. So, if you have less equity in your home, it’s safe if you file bankruptcy. Unless you have paid off more than half the loan, you probably have very little equity in your home. Some legal loopholes, like a tenancy of the entirety, can protect even more home equity.
• Retirement Account: Other than a home, a 401(k), IRA, or other retirement account is typically the largest asset a person owns. These accounts often have a substantial emotional value as well. They represent long-term financial security. Federal law shields these accounts in bankruptcy, regardless of their value.
• Personal Property: Clothes, furniture, electronics, and other personal property items are normally exempt. In some cases, a value ceiling applies. But this value represents the item’s as-is cash value. Rick’s $2,000 laptop might fetch about $200 in a garage sale.
• Wildcard Exemption: Indiana has one of the country’s largest wildcard exemptions. Debtors may use it to shield up to $10,250 of otherwise nonexempt personal property. This category includes things like motor vehicle equity, which is subject to the same principles discussed above, or cash in a savings account.

An attorney can unlock some additional informal exemptions, such as the best interest of creditors rule. Assume Julia has a nonexempt boat that’s worth $500. The trustee estimates that it needs $500 in repairs. The trustee couldn’t seize Julia’s boat in this situation. Since the creditors would get no money, it wouldn’t be in their best interests.

Commingled Benefits Issues

Social Security benefits are exempt, but it can be hard to separate them from nonexempt income, especially if the debtor keeps Social Security benefits in the same account with something like interest income. To avoid the commingling problem, many attorneys suggest that clients keep Social Security and other government benefits in a separate account.

Always speak to a lawyer before transferring money in this way. If the transfer happens within 90 days of a bankruptcy filing, the transaction is presumptively fraudulent. The trustee could also prove fraud in other situations. A bankruptcy fraud prosecution is definitely something you want to avoid. 

Contact Dedicated Cook County Lawyers

Bankruptcy protects your Social Security benefits from things like garnishment orders and bank account levies. For a free consultation with an experienced Chicago bankruptcy attorney, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

Resource:

ssa.gov/OP_Home/rulings/oasi/41/SSR79-04-oasi-41.html