Will I Lose My Social Security Benefits If I File Bankruptcy?

This common fear is valid yet completely unfounded. According to some estimates, as many as 40 percent of retirees depend almost exclusively on Social Security benefits to pay their bills. So, these people are understandably afraid to file bankruptcy, because in most cases, income is not exempt. But that’s just the point. Typically, Social Security and other government benefits are exempt assets in bankruptcy.

A Chicago bankruptcy lawyer can do more than protect your Social Security benefits from creditor seizure and other adverse actions. An attorney helps you maximize this exemption, as well as other ones in the Bankruptcy Code. As a result, debtors who work with lawyers maximize their fresh starts.

Retirees and Bankruptcy

Although the overall bankruptcy filing rate has declined since 2005, the over-65 filing rate has increased significantly. Many of these individuals are squeezed between rising healthcare expenses and a shrinking social safety net.

These debtors have some unique concerns when they file bankruptcy. In addition to Social Security benefits, which are outlined below, they have some rather large assets to protect, such as:

• Home Equity: The equity exemption amount in the Prairie State is one of the lowest dollar values in the country. Some strategies to expand this exemption include a tenancy of the entirety. Basically, if only one homeowner files bankruptcy, creditors cannot touch the house, regardless of the amount of equity protection.
• Retirement Account: Unlike the homestead exemption, IRAs, 401(k)s, and other nest egg accounts have unlimited exemptions. That’s good news for account owners. Unfortunately, some owners transfer money into these accounts prior to filing bankruptcy. Such transfers could be considered fraudulent.

The benefits of bankruptcy for retirees are hard to ignore. The Automatic Stay immediately halts foreclosure, repossession, and most other kinds of adverse creditor actions. Furthermore, bankruptcy discharges most unsecured debts. Therefore, retirees don’t have to dip into their savings to pay things like credit cards and medical bills.

Property Exemptions

As mentioned, Social Security benefits are exempt in bankruptcy. Most other government benefits, such as unemployment insurance payments and VA disability benefits, are also exempt. Government-affiliated benefits, like child support payments, are usually exempt as well.

In fact, most real and personal property is exempt in bankruptcy. So, there’s usually no need to transfer property into trusts or take other extreme measures.

Furthermore, the Social Security Administration considers these benefits to be exempt assets. So, in the unlikely event the trustee (person who oversees the bankruptcy for a judge) tried to make the debtor return these benefits, the SSA probably won’t accept them.

Protecting Social Security Benefits

Typically, the SSA pays these benefits in monthly allotments. Most debtors have these payments directly deposited into a bank account.

If, as is usually the case, the debtor puts all income, including both Social Security and non-Social Security income, into the same account, that could be a problem. If government benefits are commingled with non-exempt income, it’s difficult to separate them. So, it’s usually best to place government benefits in a separate account. An attorney can help you set that up.

On a related note, bankruptcy normally cancels most direct deposit and ACH arrangements. Technically, the Bankruptcy Code prohibits creditors from communicating with debtors. Some financial institutions interpret this provision very broadly. Therefore, Social Security recipients should be prepared to make other arrangements to receive payments when they file bankruptcy.

Reach Out to Compassionate Cook County Lawyers

Your Social Security benefits are safe when you file bankruptcy. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

forbes.com/sites/andrewbiggs/2020/01/27/factcheck-do-40-of-retirees-rely-on-social-security-for-their-entire-income/?sh=76b700202db4