Does Bankruptcy Affect My Social Security Benefits?

This question is especially important to the many retirees who file bankruptcy, usually because of medical bills. For roughly a third of folks over 65, Social Security benefits account for at least 90 percent of their income.

In general, the Chapter 7 rules distinguish between assets and income. Assets, such as retirement accounts and houses, are usually exempt. Income, whether from employment, royalties, or anything else, is generally not exempt.

Federal law is very clear that Social Security is an asset and not income, even though it comes in monthly installments like income.

Exempt Assets in Bankruptcy

The reason for this distinction is rather simple. In most cases, income is replaceable. At least theoretically, people can find new jobs and new sources of income. So, the Bankruptcy Code usually does not protect income.

But people who receive Social Security benefits, either due to age or disability, probably do not have that option. So, the Bankruptcy Code protects Social Security benefits for the same reason it protects workers’ compensation, VA disability, and other government benefits.

Many exemptions are limited, because they are value-based. For example, neither Indiana nor Illinois have home exemptions as such. Both states allow bankruptcy debtors to exempt a certain amount of home equity.

In most cases, the home equity exemption is more than generous enough to protect a home. In borderline cases, a Chicago bankruptcy attorney knows how to maximize home equity and other exemptions. For example, there is usually a difference between a home’s fair market value and its bankruptcy Schedule A value.

The Social Security benefits exemption is different. It is asset-based. All Social Security benefits, regardless of the amount, are 100 percent exempt. The same is true of the other government benefits mentioned above.

The same is also true for private retirement accounts, like IRAs and 401(k)s. Outside bankruptcy, creditors may be able to attach retirement accounts. It’s almost impossible for them to do that if the debtor files bankruptcy.

Commingling Social Security Funds

Mixing exempt and nonexempt funds is usually not an issue for Social Security Disability (SSD) recipients. These individuals usually do not have other jobs. But for Social Security Insurance (SSI) recipients, the commingling rule could be important. SSI benefits are the age-related Social Security benefits.

As mentioned, employment and other income is generally not exempt. A current wage exemption may apply, but only to part of the income. In this context, commingling means that the debtor mixed exempt SSI funds with nonexempt income. Such commingling is very common. Most people put all their money in joint accounts.

At a bankruptcy trustee meeting, commingling is a red flag. The debtor must separate exempt Social Security benefits from nonexempt income. Otherwise, the trustee (person who oversees the bankruptcy for the judge) may consider all the money in an account to be nonexempt income as opposed to exempt benefits.

Keeping these items in separate bank accounts may be a good idea. But before you move money, speak with a bankruptcy attorney. Pre-filing transfers may be evidence of bankruptcy fraud.

Rely on Experienced Lawyers

Bankruptcy may protect your Social Security benefits. For a free consultation with an experienced Chicago bankruptcy attorney, contact the Bentz Holguin Law Firm, LLC. We routinely handle matters in Indiana and Illinois.

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