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.
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.
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:
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.
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 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.
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:
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.