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With the economic chaos brought about by COVID-19, millions of once financially secure Americans have been forced to think about bankruptcy. Many households who are feeling the pressure include seniors who rely on Social Security. If you receive Social Security, it’s important to understand the implications of a bankruptcy filing on your benefits.

Several factors determine if you can keep all your Social Security benefits in bankruptcy.

Chapter 7 and Chapter 13 bankruptcies have different rules, as does each state. In addition, how you manage your money can also make the difference between Social Security payments that are protected from creditors or eligible for seizure.

Social Security and Debt Collection

Households that are considering bankruptcy usually have accounts in collections or are close to defaulting due to inevitable insolvency. If you have creditors pursuing you for debts, it’s important to understand that your Social Security benefits are shielded from seizure. Congress protects these funds because they are meant for essentials, such as housing, food and medicine.

Though Social Security benefits cannot be garnished like wages, you should be certain to never co-mingle Social Security and other funds. Once co-mingled, it becomes difficult to establish which funds count as protected Social Security. A creditor could levy your bank account and take everything. To prevent this, keep Social Security payments in a separate account, so the protected status is easily demonstrated.

Social Security and Chapter 7

In a Chapter 7, the bankruptcy trustee liquidates all the debtor’s non-exempt property and uses the proceeds to pay creditors. In exchange, the debtor walks away from further obligations on discharged debts. Many types of property are exempt from seizure, including Social Security benefits.

However, as with debt collection, co-mingling of funds can result in the impoundment of Social Security benefits despite their exempt status. Because co-mingling of funds makes it difficult to separate which dollars are from Social Security versus other sources, Social Security benefits should be kept in a separate account.

Tip: If you have co-mingled funds and are considering bankruptcy, first open a separate account for future Social Security benefits. Then use the remaining funds in your co-mingled account to pay for basics, such as housing, food and medicine. When the co-mingled account is empty, file bankruptcy. You will then be able to keep all the funds in the Social Security account.

Social Security and Chapter 13

Chapter 13 bankruptcies give debtors a chance to restructure their debts into a court-approved payment plan, which lasts between three- and five years. At the end of the payment plan, any monies still owed on eligible debts are discharged. Because the debtor has agreed to a payment plan, he or she does not surrender any property.

For example, many households facing foreclosure file a Chapter 13 because they can make up payments through a court-approved plan and keep their homes. For this reason, Chapter 13 is often referred to as the “home-saver bankruptcy”.

If you have significant non-exempt property, chances are you would opt for a Chapter 13. But are your Social Security benefits protected?

In a Chapter 13, it depends on the jurisdiction. In some localities, Social Security benefits are exempt; therefore, debtors do not have to contribute any of their Social Security benefits towards a payment plan. In other jurisdictions, Social Security is included in the household’s total income, thus requiring debtors to pay a higher overall amount that includes a portion of their Social Security income.

For example, imagine you had a monthly income of $600 from Social Security and $1000 from a non-exempt source, such as earnings from a part-time job. In this case, the court would also compare your necessary expenses to your income. Let’s say they totaled $900 monthly, including taxes. In jurisdictions that exclude Social Security income, the court would consider your income as $1,000 per month, leaving you $100 per month with which to pay creditors. For jurisdictions that do not exempt Social Security, your income would be $1,600 per month, leaving you with up to $700 per month to pay creditors.

Because the outcome of your case depends quite a lot on the locality and your financial situation, it’s important to understand the bankruptcy law and consult a lawyer. Social Security is protected in many cases, but before filing bankruptcy, it’s important to ensure Social Security benefits are held in a separate account and to understand the local regulations.

Hines Law has been representing bankruptcy clients throughout Massachusetts for over 15 years. Experience and extensive knowledge are at the core of our practice, specializing in Chapter 7 and Chapter 13 filings. If you are overwhelmed with credit card debt, struggling to pay your bills, or facing foreclosure and wage garnishment, our bankruptcy attorneys are here to help! Call today and schedule a Free Consultation!