Most debtors need their Social Security disability payments (SSDI) and Supplemental Security Income (SSI) disability payments to live on while they are unable to work. In most cases your Social Security disability payments are protected in Chapter 7 bankruptcy -- meaning the bankruptcy trustee cannot take them. But there are some exceptions. Whether you can keep all of your SSDI payments depends on:
- where you live
- whether you receive Social Security disability benefits or payments from another source, and
- whether you are trying to protect past or future disability payments.
If you receive SSI disability payments, those are always exempt in bankruptcy.
Social Security Disability Benefits
Generally, both bankruptcy and Social Security laws prevent your disability payments from being taken in a Chapter 7 bankruptcy. But whether a Chapter 7 trustee may be able to go after your disability payments depends on where you live and whether you have ongoing payments or received a lump sum payment for past benefits. (To learn how Chapter 7 works and when the trustee might take your property or money, see our Chapter 7 Bankruptcy area.)
Future Social Security Disability Payments
If you receive ongoing Social Security disability benefits, you are typically allowed to keep your payments in Chapter 7 bankruptcy. Most debtors rely on these payments to support themselves and their families because they are unable to work. As a result, most states and the federal government have exemptions that protect future disability payments from the Chapter 7 trustee. (To learn how exemptions work and to find the exemptions in your state, visit our Bankruptcy Exemptions area.)
Lump Sum Payments for Past Social Security Disability Benefits
If you received a lump sum disability payment before filing your case, you will have to trace the money and show that it was a Social Security disability payment to protect it from the Chapter 7 trustee.
In general, all disability benefits received under the Social Security Act (including lump sum payments) are exempt and protected in bankruptcy proceedings (42 U.S.C. §407). In fact, a recent decision from the Eighth Circuit Bankruptcy Appellate Panel held that Social Security disability benefits are excluded from property of the bankruptcy estate altogether. This means that debtors get to keep their disability payments without even having to claim them as exempt.
However, other courts have reached different conclusions and require debtors to exempt their disability payments in Chapter 7 bankruptcy. Luckily, the exemption found in the Social Security Act can also be used to exempt your disability payments in bankruptcy. Further, most states (and the federal bankruptcy exemptions) have additional exemptions that protect your disability benefits.
But keep in mind that while most Social Security disability benefits are exempt in Chapter 7 bankruptcy, certain jurisdictions have created an implied exception that only protects amounts necessary for your care and maintenance. So depending on where you live, a Chapter 7 trustee may be able to go after a lump sum disability payment if it is not necessary for your support.
Because the interaction between bankruptcy and Social Security laws can be complex, consider talking to a knowledgeable bankruptcy attorney in your area prior to filing your case. (You can contact a lawyer in Nolo's network of bankruptcy attorneys here.)
Supplemental Security Income (SSI) Disability Payments in Bankruptcy
SSI is a federal program that provides financial assistance to elderly, blind, or disabled individuals with little or no income. SSI disability payments are designed to help people with their basic living expenses such as food, shelter, and clothing.
Since SSI payments provide debtors with the minimum income necessary for support, they are exempt in bankruptcy by federal law. Lump sum payments are also exempt because the Social Security Administration has strict rules about how these payments must be used. However, keep in mind that you may need to trace the payment and show that it was an SSI benefit to claim it exempt.
State, Private, or Other Disability Payments
If you are receiving disability benefits from sources other than Social Security, then the amount of payments you can keep depends on where you live. Each state has a unique bankruptcy exemption system that allows you to protect a certain amount of property in Chapter 7 bankruptcy.
While most states have exemptions that protect disability payments, exemption amounts vary from state to state. As a result, check your state’s bankruptcy exemptions to determine whether you can keep your disability payments in Chapter 7 bankruptcy before filing your case.