Can Bankruptcy Take Your Social Security?

Federal law protects Social Security funds in bankruptcy.

By , Attorney

Social Security benefits are exempt and therefore protected in bankruptcy, so you can keep your Social Security benefits if you file for bankruptcy, regardless of where you live. However, it's a good idea to maintain your benefits in a separate account because once commingled with other funds, it can be difficult to prove that the money came from Social Security benefits rather than another source.

How Chapter 7 and Chapter 13 Bankruptcy Work

Most consumers file one of two types of bankruptcy—either Chapter 7 or Chapter 13. Here are a few of the differences between the two.

  • Chapter 7 bankruptcy. In this chapter, you get to wipe out many, or all, of your debts. In return, you might have to turn over some of your property to the bankruptcy trustee who will sell it and use the proceeds to repay your creditors. You don't have to turn everything over, however. State and federal law allow you to protect (exempt) certain types of property. To qualify for Chapter 7 bankruptcy relief, you must pass something called the "means test," which looks at your income and expenses.
  • Chapter 13 bankruptcy. If you earn too much to qualify for a Chapter 7 discharge, you might have to file for Chapter 13 bankruptcy instead. In Chapter 13 bankruptcy you'll keep all of your property and pay into a three- to five-year repayment plan. You'll need to demonstrate that you have sufficient income to make your monthly plan payments. (You can find out more in Chapter 13 Bankruptcy.)

Listing Property in Your Bankruptcy Papers

You must list all of the property you own in your bankruptcy petition. It doesn't matter whether the money is sitting in an account or stashed under your mattress, once you receive your Social Security funds, its status changes from income to property, and you must list it on your bankruptcy petition.

Examples of other types of property you must disclose include:

  • cash
  • money in investment, retirement and bank accounts
  • real property, including your primary home, any rentals, and vacation property
  • hobby and sporting equipment
  • jewelry, such as wedding rings, and
  • anything else you own, including your pets.

Social Security Benefits Are Exempt Property

Each state has its own set of laws regarding how much property you can keep when you file bankruptcy. Although you'll get to keep most necessary household items and a modest car, there's no guarantee that everything will remain yours. The primary role of the Chapter 7 bankruptcy trustee is to liquidate (sell) all of your non-exempt property and distribute the proceeds to your creditors. If your state says you can keep a particular item, you do so by declaring it "exempt." (Find out more about how to exempt property in bankruptcy.)

While your state usually decides what you can and cannot keep in bankruptcy, federal law says that all of your Social Security funds are exempt property. No matter what state you live in, you get to keep Social Security money.

Don't Commingle Social Security Money With Other Funds

When you declare that certain funds are exempt in bankruptcy (you do this in your bankruptcy papers), it's your responsibility to prove your right to retain the money. Just because you claim that a portion of your bank account balance is exempt Social Security benefits doesn't mean that the bankruptcy trustee will believe you—especially if you've mixed the benefits with other funds in the same account (called commingling). Commingling makes it difficult to prove which funds are exempt.

Keeping a Separate Social Security Account

Keeping your Social Security benefits in a separate account that you use exclusively for those funds is a good practice to prevent commingling issues. It allows you to trace the source of the funds to your Social Security check or an automatic deposit from the Social Security Administration. This is a good idea, even if you aren't contemplating bankruptcy. It makes it easier to protect your Social Security money from creditors' efforts to collect judgments.

What to Do If You've Commingled Funds

If you've already commingled your funds, there are a few ways to handle the situation. Here are some strategies you may want to consider:

  • Before filing for bankruptcy. If you haven't filed bankruptcy yet, you might want to open an account that you use solely for your Social Security benefits. Then consider exhausting the commingled funds in your other account before filing bankruptcy by using them to pay for necessities of life, such as rent, utilities, and food.
  • After filing for bankruptcy. If you've already filed bankruptcy, or cannot wait to exhaust the commingled funds, you might be able to use another exemption. For example, some states have wildcard exemptions that allow you to protect any property you wish. Others protect a certain amount of cash or bank account funds.

If You're Considering Chapter 13 Bankruptcy

Most people who receive Social Security funds will likely file for Chapter 7 bankruptcy—but that's not always the case. For information about what to expect, start by reading Can I Keep My Social Security Income During My Chapter 13 Bankruptcy?

However, because Chapter 13 cases are inherently more complicated, you should consult with a bankruptcy lawyer.

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