There are many things to consider when contemplating bankruptcy. For those who receive Social Security benefits (SS), or Social Security Disability Insurance benefits (SSDI),  it is essential to understand how these benefits will be affected by your bankruptcy filing.

There are two basic types of bankruptcy for individuals – Chapter 7, and Chapter 13. If you have not yet determined which is suitable for you, please click the associated links to learn more about each option.

Social Security Benefits as Sole Income

If SS or SSDI represents your only income, typically, federal law protects you from creditors garnishing your money (U.S.C. 42 § 407). Here is the information you need to know:

* In the case of unpaid unsecured debts (such as medical bills, credit cards, personal loans, and most civil judgments), creditors are not allowed to garnish your social security benefits.

* There are some exceptions to this law – creditors may have access to your funds if you owe taxes, alimony/maintenance, child support, student loans, and some other types of government debt.

Commingling of Funds

However, if your SS or SSDI benefits are commingled with funds from another source, you may lose your protection under the law. If you deposit your SS or SSDI funds into a joint bank account with a spouse or adult child, this may occur. Once another form of funds is mixed with the SS funds, proving what portion of those finances is actually SS or SSDI benefits may be challenging. Because you can’t effectively separate the funds, creditors may be allowed to garnish the entire balance of the joint account. 

Therefore, experts strongly recommend that all SS and SSDI funds be kept in a separate account. Never deposit any other type of funds into these accounts, and you should be protected against most forms of garnishment.

Although creditors cannot garnish your SS and SSDI benefits, they still have the option of debt collection if you don’t file bankruptcy. Debt collection means you may be harassed with phone calls, letters, lawsuits, and court appearances, and your credit score will be adversely affected.

If you want to avoid the anxiety of debt collection, a Chapter 7 bankruptcy may be your solution.

Social Security and SSDI Benefits in Bankruptcy 

If you are a SS recipient and opt to file Chapter 7 bankruptcy, your benefits are exempt under bankruptcy law. This means that you will not lose your SS benefits should you choose to file for bankruptcy. This rule includes any lump-sum payments, as well as past, current, and future payments.

However, as stated, this income is only protected if you can prove the funds in your account were derived solely from SS or SSDI benefits. Keep in mind that any SS or SSDI benefits you receive after your bankruptcy filing are protected regardless.

In Summary

If you live only on SS or SSDI income benefits and you can’t afford to pay your bills, you can file for bankruptcy without the risk of losing your funds.

It is important to note that this article only outlines the most basic of circumstances. Every individual’s situation is unique and requires legal advice from a bankruptcy attorney or financial professional.

The attorneys at the law offices of Richard V. Ellis are bankruptcy experts. We have helped hundreds of Sarasota area residents find their way back to financial freedom. Don’t risk your hard-earned and deserved social security benefits –  call us today.