Is Your Social Security and Disability Covered If You File for Bankruptcy?

The bankruptcy process is complicated and shouldn't be taken lightly.

No matter which you choose to file, bankruptcy often severely damages your credit. Even so, it can give you the fresh start you need.

Adding Social Security and disability payments into the mix make things even more complex.

If you’re currently receiving Social Security or disability benefits, you may not have a lot of assets or disposable income.

The last thing you can afford is for these payments to be taken in bankruptcy.

But do Social Security benefits count as income for bankruptcy purposes? 

Thankfully, you may not have to give up your income or assets built from these benefits depending on your particular situation.

Unfortunately, bankruptcy isn’t simple.

In order to protect your Social Security and potentially your disability benefits, you need to follow certain guidelines.

For this reason, you should consult a bankruptcy attorney.

A bankruptcy attorney can take a look at the specific circumstances of your case. They can advise you so you get the most favorable outcome. 

Before visiting an attorney, it’s a good idea to get a general understanding of how bankruptcy could affect your Social Security and disability. 

Here’s a high-level overview of what you should know. This can help you know what questions to ask when you consult an attorney before filing for bankruptcy.

Two Types of Bankruptcy

In general, most people file for one of two types of bankruptcy. The type of bankruptcy you file determines what happens to your assets. 

Here’s a quick overview of the major differences.

Note: These are not detailed explanations. A bankruptcy attorney can share exactly how these processes work.

Chapter 7 bankruptcy

In simple terms, Chapter 7 bankruptcy works by taking all non-exempt assets to pay off your debts as much as possible. 

After the bankruptcy is over, most types of unsecured debt are wiped out. Certain exceptions apply. For instance, student loan debt, tax debt and child support debt may remain. 

You may have other debt related to secured loans, such as a car loan or a mortgage. These may remain after bankruptcy. 

In order to keep these assets and associated debt, you usually have to be current on your payments before filing bankruptcy.

You do have to qualify for Chapter 7 bankruptcy. You do this through a means test. 

This varies state by state.

It helps determine if you have the ability to repay your creditors. The means test helps prove you’re truly unable to repay your debt.

Many people earning Social Security benefits or disability benefits that are considering bankruptcy usually don’t have many other assets or sources of income.

For that reason, this type of bankruptcy is often used.

Chapter 13 bankruptcy

Chapter 13 bankruptcy is very different from Chapter 7 bankruptcy.

Instead of having your debt wiped out quickly, this type of bankruptcy requires you to make a repayment plan. You don’t have to pass a means test to qualify for Chapter 13 bankruptcy.

In Chapter 13 bankruptcy, you don’t turn over your non-exempt assets.  However, you will have to repay your creditors. 

This typically happens over a three to five year period. The exact timeline is based on the payment plan set up in bankruptcy.

Social Security and Bankruptcy

Now that you understand the basics of Chapter 7 and Chapter 13 bankruptcy, it’s easier to understand what happens to Social Security benefits in bankruptcy.

Bankruptcy laws vary from state to state.

The best part:

The federal government has made one important part of the bankruptcy process consistent. 

Whether you file for Chapter 7 bankruptcy or Chapter 13 bankruptcy, Social Security benefits are considered exempt property across the nation.

Lump-sum payments of Social Security funds, such as payments for retroactive benefits, are usually also exempt.

That means:

The bankruptcy trustee cannot take Social Security payments as part of the bankruptcy. You do have to prove the funds are Social Security funds, though. That’s where things get a bit tricky for some people.

Proof for exemption

In order for Social Security funds to be exempt, you must be able to prove with absolutely no doubt they’re Social Security funds.

Be careful:

If you mix Social Security money with any other type of money in a bank account, it may no longer be exempt.

This is because once you commingle the money, you can no longer tell which source of income you withdraw from the account. 

Did you withdraw your Social Security money? Or did you withdraw the other funds? There is no way to earmark the individual dollars to find out.

Ensuring Social Security income in bankruptcy

In order to protect your Social Security income from bankruptcy, there is an easy solution.

You basically have to have a bank account that only receives Social Security money. 

Never put any other money or income you receive in that account. If you do this, the money in your bank account should be exempt.

Consult a bankruptcy attorney for specifics related to your situation.

Disability and Bankruptcy

Disability income is a bit trickier under bankruptcy laws. That’s because there are many types of disability income. Each type may be treated differently. 

This is especially true because the laws vary on a state-by-state basis.

SSDI and SSI

The first types of disability income to discuss are Social Security related disability benefits. These include Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). 

In general, these are safe from bankruptcy thanks to federal laws.

Specific exceptions

Like with Social Security benefit income, you have to be able to prove your SSDI or SSI income is actually from SSDI or SSI. 

To help make this clear as day, you should not commingle this money with other money.

If you do end up commingling the money, you can no longer prove it is SSDI or SSI income. That means it may no longer be exempt. Always keep this money separate from all other money.  

One rare case that may be an exception to the general rule is lump-sum payments.

In these cases, this income may be subject to bankruptcy proceedings. 

In certain areas of the country, money above and beyond what is needed for your basic care, support and maintenance may be able to be taken in bankruptcy. 

This could be true even if you don’t commingle it with other funds. It depends on the laws in your area.

Consult an attorney. They can tell you what could happen with any lump-sum disability benefits you have received in the past.

Other Types of Disability Income

SSDI and SSI aren’t the only sources of disability income. You could receive disability income from other sources.

Examples include a state program, a policy you took out yourself or a policy through your employer. 

There are even different types of disability policies such as short-term disability insurance and long-term disability insurance.

These other types of disability income are more complex to deal with in bankruptcy.

Unfortunately, there aren’t federal laws protecting all disability income.

That means:

Disability income from these other sources may be subject to bankruptcy. Each state has its own bankruptcy laws and regulations. 

You’ll have to consult the specific laws where you’ll be filing bankruptcy. Then you can see if your disability income is exempt from bankruptcy or whether it may be at risk.

The best way to do this is to consult with a professional in your area. Professionals are familiar with your local bankruptcy laws. 

They can determine exactly what type of disability income you have. They can then share how it could impact your bankruptcy case.

What Happens to My Social Security and Disability Assets by Bankruptcy Type

If your assets are determined exempt, you don’t have to use them as part of the bankruptcy process.

If you file Chapter 7 bankruptcy and your assets were commingled or otherwise found to be non-exempt, you may have to turn over that money. It will then be used to pay off your unsecured creditors as part of the bankruptcy process.

If you file Chapter 13 bankruptcy and your assets were commingled, you may have to use some of that money as part of your repayment plan.

Consult a Bankruptcy Law Firm

Social Security and bankruptcy can be a complicated mixture.

The same can be said for disability and bankruptcy.

There are rules to help people protect certain types of Social Security and disability benefits.

Even so, it is imperative everything is set up correctly.

A bankruptcy law firm or bankruptcy attorney can look at your specific situation. They can give you advice based on your circumstances. They can also determine if your specific Social Security and disability money should be exempt or not.