Does Chapter 7 Affect My Social Security Benefits?
Mostly because of age or disability, millions of people depend on Social Security benefits. In many cases, these benefits are the only consistent income source for an Indiana family. Losing these benefits would be catastrophic. It would be even worse than a job loss, because many of these people have no financial alternative.
However, the Social Security Administration has consistently taken the position that Social Security benefits are an asset instead of income. Like most other government benefits, such as unemployment compensation, this asset is normally exempt. So, even if the trustee (person who oversees the bankruptcy for the judge) directs the debtor to return money to the Social Security Administration, which is not likely, the SSA would probably send it back.
Nevertheless, there is some interplay between bankruptcy and Social Security benefits. Generally, this interaction is minimal, so these issues should not deter Indiana families from seeking the debt relief that they so badly need.
Qualifying for Chapter 7 with Social Security Benefits
All Chapter 7 debtors must qualify under the means test. Their incomes must be lower than the average income for that state. As of April 1, 2019, the average Indiana resident earns $49,421 per year. So, if a debtor has both employment and Social Security income, qualifying under the means test might be a problem.
But not to worry. Only employment and self-employment income counts on the means test. Therefore, Social Security benefits never disqualify debtors under the means test.
Amount of disposable income, however, is another matter. Social Security income and other government benefits are reportable on Schedule I, which is the debtor’s total monthly income. Debtors must also report alimony, child support, and any other type of income on Schedule I. If there is a significant difference between Schedule I and Schedule J, which is the debtor’s monthly expenses, the trustee might ask why the debtor needs to file Chapter 7. In a few cases, the judge could even deny discharge based on surplus monthly income.
An experienced attorney knows how to fill out paperwork and avoid this problem. Many times, monthly expenses are much higher than people think. If worst comes to worst, the debtor can convert from Chapter 7 to Chapter 13. The debt discharge will still come, but the debtor may have to wait a little longer and pay down some unsecured debt, like credit cards and medical bills.
Commingled Social Security Funds
Most people place government benefits, like Social Security payments, in the same bank account with employment income and other nonexempt money. If the debtor files bankruptcy, that convenience could be a problem. If the Social Security money is not separate, the trustee does not know how much money in the account is exempt and how much is nonexempt.
Tracing may be possible, but many times, direct deposits do not reflect the fact that the money is from the Social Security Administration. Manual deposits of paper checks never have such notations. So, if you are considering bankruptcy, it’s generally best to place Social Security benefits into a separate account. You can still pull out money whenever necessary to pay bills.
Before you move any money, talk to your bankruptcy attorney. Such activity could be considered bankruptcy fraud in some contexts, and that is additional trouble you definitely do not need.
Connect with Savvy Lawyers
There is some interplay between bankruptcy and Social Security benefits, but this money is generally not at risk. For a free consultation with an experienced Chapter 7 bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. After-hours visits are available.
Resource:
secure.ssa.gov/poms.nsf/lnx/0502220040
