Can I Keep Social Security Benefits in Chapter 7 Bankruptcy?

Social security benefits are exempt in Chapter 7 bankruptcy, which means you get to keep them.

You can keep your social security benefits if you file for Chapter 7 bankruptcy, regardless of where you live. This is because social security benefits are exempt property, which means they are protected in bankruptcy. It is a good idea to maintain your benefits in a separate account, however, because once commingled with other money, it may be difficult to prove that the funds come from social security benefits rather than another source.

How Chapter 7 Bankruptcy Works

In Chapter 7 bankruptcy 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.

In order to qualify for Chapter 7 bankruptcy relief, you must pass something called the "means test," which looks at your income and expenses. If you earn too much, you might have to file for Chapter 13 bankruptcy instead. Luckily, any amount of social security benefits received before you file bankruptcy, and any amount you expect to receive in the future, is not included in your monthly income when calculating whether you qualify for a Chapter 7 bankruptcy. (To learn more, see Is Social Security Income Counted in the Chapter 7 Bankruptcy Means Test?)

Listing All of Your Property on Your Bankruptcy Papers

You must list all of the property you own in your bankruptcy petition. (Find additional information regarding disclosing personal property.) It does not 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:

  • cold, hard 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. While you get to keep most of your basic household items and a modest car, there is no guarantee that everything will remain yours. This is because one of the main roles of the bankruptcy trustee is to liquidate 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. This means that 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 is 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 your benefits are mixed with other funds in one account, called commingling. If you commingle fund, it makes it difficult for you to prove which funds are actually exempt.

Keep a Separate Account for Your Social Security Funds

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 Already Commingled Funds

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

Before filing bankruptcy. If you haven’t filed bankruptcy yet, you may 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 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.

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