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

The rising number of over-65 bankruptcies has pushed this question  from the background to the forefront, at least for many Illinois families. Almost half of unmarried seniors, and about a quarter of married seniors, count on Social Security benefits for 90 percent of their monthly income.

Generally, bankruptcy does not affect Social Security benefits. In fact, in many cases, bankruptcy might be the only way to preserve them. Without bankruptcy’s Automatic Stay, debt collectors might be able to hijack these benefits. Many families cannot absorb such a crippling financial blow.

Asset v. Income

Generally, assets are exempt in bankruptcy and income is not exempt in bankruptcy. So, are Social Security benefits an asset or income? Since they usually come monthly, most people assume these benefits are nonexempt income.

But not so fast. The dictionary definition of an “asset” is “a useful or valuable thing or person.” “Income,” on the other hand, is “money received, especially on a regular basis, for work or through investments.”

According to these definitions, Social Security benefits are clearly not income. The payments might be regular, but they have nothing to do with employment or investments. The asset definition seems much more appropriate. Social Security benefits are clearly valuable things.

Additionally, Social Security benefits are essentially retirement accounts. The Supreme Court recently reaffirmed that these accounts are 100 percent exempt in bankruptcy, regardless of their value.

The Social Security Administration has consistently taken this same position. According to the SSA, financial benefits are assets and not income. Illinois bankruptcy trustees usually agree with this stance.

Other exempt assets in bankruptcy include personal property, home equity, and motor vehicles. Unlike Social Security benefits, some of these exemptions have financial limits. Some income, mostly current wages, is exempt in Illinois. It’s difficult, but not impossible, to exempt savings or investment accounts.

Protecting Social Security Benefits

However, the asset/exemption distinction is not always clear. That’s especially true if the debtor commingles these funds in the same account.

Other examples of commingling include store-issued credit cards, like a Rooms to Go card. Technically, the RTG card is an unsecured debt which is dischargeable in a Chapter 7. However, these debtors can only use these cards to buy furniture, and that’s a secured debt.

This problem may not be as bad as people think. Generally, bank statements include notes about direct deposit sources. So, it’s relatively easy to trace money to employment income or Social Security benefits. How that money is spent, however, is another matter.

So, it is usually best to keep Social Security benefits in a separate account apart from any other income. That movement might involve moving the Social Security payments to another bank.

Before you move money in this way, always speak with a Chicago bankruptcy attorney. There is a 90-day fraud presumption in this area. Any unusual financial moves made within three months of a filing are presumptively fraudulent. Bankruptcy fraud is a very serious matter.

Contact Dedicated Lawyers

Social Security benefits are almost always exempt assets. For a free consultation with an experienced Chicago bankruptcy attorney, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

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