Being unable to work due to a disability can have broad-reaching effects, especially when it comes to your financial responsibilities. You may even be forced to file for bankruptcy if your debts become too severe to be handled through other means. But if you currently receive Social Security disability benefits, then you're likely concerned about how Chapter 7 and Chapter 13 bankruptcy will impact your benefits.
Disability Benefits in Chapter 7 Bankruptcy
Although nearly all of your personal property and assets will fall under the control of the bankruptcy estate and the assigned trustee, your Social Security Disability Insurance (SSDI) benefits may not share the same fate. Not only does the Social Security Act prohibit SSDI benefits from being levied, attached or garnished, but there are also various state statutes that exempt SSDI benefits, in most cases.
However, there's an important exception to this rule. In some states, the bankruptcy trustee may be able to take a significant portion of any lump sum SSDI payment you receive. This is due to the fact that these states have an implied exception that covers only basic care and maintenance. This means that any lump sum amount that goes beyond what's needed for your support may end up in the hands of your assigned trustee.
Also keep in mind that your Social Security disability income won't be included as part of your current monthly income (CMI) when means testing for Chapter 7 bankruptcy eligibility. However, this won't have any impact on your Chapter 7 eligibility. You'll automatically pass the means test as long as your annualized CMI remains below the median income threshold for your household's size in your state.
Disability Benefits in Chapter 13 Bankruptcy
Chapter 13 bankruptcy differs vastly from Chapter 7 bankruptcy. For instance, there's no bankruptcy estate or trustee involved in Chapter 13 bankruptcy. Instead, the bankruptcy court will arrange for a repayment plan that covers most or all of your debt. This means that you'll be able to retain all of your assets as long as you maintain your negotiated repayment plan.
In most cases, your disability benefits are usually considered exempt from Chapter 13 bankruptcy proceedings. This means that your SSDI benefits won't be garnished or attached in order to repay your creditors. However, there's the possibility that your disability income could be considered if you fail to cover the repayment plan. For this reason, it's important to report to the bankruptcy court the exact amount you receive in disability benefits each month and assert your allowable Social Security benefits exemption.
Bankruptcy and SSI benefits
Since Supplemental Security Income disability benefits provide debtors with income necessary for food, shelter and other basic living expenses, they're usually exempt in Chapter 7 and Chapter 13 bankruptcy. Lump sum payments for past SSI benefits are also deemed exempt by federal law. However, the bankruptcy court may require you to trace any lump sum SSI benefit received back to its source in order for it to be considered eligible for exemption.
Mixing Social Security payments with non-exempt funds may throw your exemption into question. To prevent this from happening, it's usually a good idea to keep your disability and SSI benefits in a separate account. This will allow you to easily prove where the funds came from and eliminate any doubts over eligibility.
In conclusion, you'll be able to protect your Social Security disability benefits as you go through Chapter 7 or Chapter 13 bankruptcy with only a few noticeable exceptions. If you're facing the prospect of reorganizing your debts through bankruptcy, you may want to consult a Social Security disability attorney, such as those at Horn & Kelley, PC Attorneys at Law, before moving ahead with your bankruptcy plans.