How Bankruptcy Affects Social Security Benefits

Filing for bankruptcy can be a difficult decision that involves weighing many financial factors. One question that often comes up is how bankruptcy will impact Social Security benefits. While Social Security income is generally protected in bankruptcy, there are some important details to understand.

Social Security Income is Usually Exempt

The good news is that Social Security income is considered exempt from forfeiture in bankruptcy. This means the bankruptcy court cannot take your Social Security benefits to pay back creditors or trustees. According to federal law, Social Security benefits are exempt assets that cannot be tapped to repay debts in bankruptcy.

For example, let’s say Mary files Chapter 7 bankruptcy. She receives $1,500 per month in Social Security retirement benefits. The court cannot force Mary to give up or redirect any of her $1,500 Social Security payments to pay off debts in her bankruptcy case. Her benefits are exempt and she can continue receiving them as usual.

This exemption applies to many types of Social Security benefits, including retirement, disability, and survivor benefits. It also usually applies in both Chapter 7 and Chapter 13 bankruptcies.

Certain Exceptions May Apply

While Social Security benefits are generally exempt in bankruptcy, there are a few exceptions to be aware of:

• Child support or alimony – Your benefits can be garnished to pay delinquent child support or alimony.
• Federal taxes – Your benefits may be subject to levy by the IRS for unpaid federal taxes.
• Student loans – Some courts allow student loan creditors to garnish a portion of Social Security income to collect on defaulted student loans.

So in limited cases, a creditor may be able to access part of your Social Security income to pay back specific types of debts. This is rare, but it’s important to be aware of.

Social Security Counts as Income in Means Test

One indirect way bankruptcy can impact Social Security is through the means test. This is a formula used to determine if you qualify to file Chapter 7 bankruptcy based on your income. Your gross Social Security benefits count as income in this test.

For example, let’s say John receives $2,000 per month in Social Security. When calculating his income for the means test, the court will include his full $2,000 Social Security payment. If his total income is above the state median, John may be required to file Chapter 13 instead of Chapter 7.

So while you don’t lose any of your actual Social Security benefits, the income can impact the type of bankruptcy you are eligible for. This is an important consideration if you are deciding between Chapter 7 and Chapter 13 bankruptcy.

Strategies to Protect Social Security

If you want to shelter your Social Security income as much as possible in bankruptcy, here are some tips:

• File separately from your spouse – Filing a separate bankruptcy case from your spouse keeps your Social Security income separate.
• Avoid tapping retirement accounts – Cashing out retirement funds before bankruptcy can increase your income on the means test.
• Get legal advice – Talk to a bankruptcy attorney if you have concerns about protecting benefits.

Taking steps to minimize other income sources can help reduce the chance of your Social Security benefits being impacted in your case.

What About Social Security Disability?

If you receive Social Security Disability Insurance (SSDI), this benefit is also exempt in bankruptcy. Your SSDI payments cannot be taken to pay creditors or trustees.

One thing to watch out for with SSDI is the waiting period if you return to work after bankruptcy. Normally SSDI recipients have a 9-month trial work period where benefits continue if they return to work. But this period may be reset if your income increased enough to disqualify you right before filing bankruptcy.

For example, if you stopped receiving SSDI 2 months before bankruptcy due to increased earnings, the trial work period would start over after filing. Be sure to consult with an attorney to understand how returning to work could impact your situation.

Supplemental Security Income Rules

Supplemental Security Income (SSI) follows slightly different rules, because it is a needs-based benefit. SSI eligibility and payment amounts are tied to your income and assets.

Filing for bankruptcy can affect your SSI benefits in a few ways:

• Asset limit – Bankruptcy can lower your countable assets, helping you qualify for SSI if previously over the $2,000 asset limit.
• Income limit – Discharged debts won’t count as income, potentially increasing SSI payments.
• Past overpayment – SSI debt for overpayment is dischargeable in bankruptcy.

So while SSI isn’t directly exempt like Social Security, bankruptcy can help you access or increase SSI benefits based on reduced income and assets after filing.

Bottom Line

Filing bankruptcy is a personal decision with many financial variables to weigh. But in most cases, your Social Security retirement, disability, and survivor benefits remain intact and separate from the bankruptcy process.

Understanding the details – like how income factors into the means test – allows you to make an informed choice about how bankruptcy could impact your situation. As with any major financial move, consulting with a legal professional is advised.