Is Social Security Income Counted in the Chapter 7 Bankruptcy Means Test?

Question: Does Social Security Income Count As Income on the Chapter 7 Means Test?

I receive Social Security benefits in addition to my employment income. Are both of these types of income counted? If so, will I still pass the Chapter 7 bankruptcy means test?

Answer: Social Security Income Isn't Considered Disposable Income on the Chapter 7 Means Test

You aren't required to include Social Security benefits on the Chapter 7 bankruptcy means test. Determining whether you're qualified to receive a debt discharge in Chapter 7 bankruptcy will be based on your employment income alone. Read on to learn more about how you can pass the means test when you collect Social Security benefits in addition to employment income.

How Does Social Security Income Affect the Means Test?

Chapter 7 bankruptcy is set up for people who can't pay back unsecured debt, such as credit card debt, medical bills, and personal loans. If you can repay some or all of your debt, you won't qualify.

Your ability to pay back debt gets measured in two ways:

• The means test calculates your total income during the six-month period before your filing.
• By contrast, your budget will show whether you currently have funds left over each month to pay debt.

You Won't Include Social Security Income on the Means Test

You'll disclose the income you received from all sources during the full six-month period before filing for bankruptcy (with a few exceptions including Social Security benefits). For instance, if you file for bankruptcy on March 23, 2023, you'll include income from September 1, 2022, through February 28, 2023. The means test uses these earnings to calculate your current monthly income (CMI).

If your annualized CMI is less than the median income of your state for a similar household, you automatically pass the means test. If your CMI is above the median, you need to complete the rest of the form and take your expenses into account to determine if you qualify.

To calculate your CMI, you'll combine your monthly income from almost all sources. However, benefits received under the Social Security Act are one of the few exceptions. Social Security benefits don't count as income for means test purposes.

As a result, you aren't required to list your Social Security income on the means test. It's not part of the CMI calculation that determines whether you pass the means test.

Example. Liam makes $3,500 per month at his job. Also, he collects $1,000 a month from Social Security. The median income for a single-person household in his state is $48,000 per year ($4,000 per month). Even though Liam has a total monthly income of $4,500, he isn't required to include his Social Security income on the means test. He passes automatically because his CMI for means test purposes is only $3,500, which is below the state median.

You'll Include Your Social Security Income in Your Budget

In addition to completing the means test, you must disclose your current budget on Schedules I and J of your bankruptcy paperwork. Schedule I: Your Income is a snapshot of your current income at the time you file your bankruptcy (as opposed to the six-month look-back period used by the means test) while Schedule J: Your Expenses is a list of your current expenses.

Even though you won't list your Social Security income on the means test, you'll include it on Schedule I when calculating your budget. If Schedule I shows a significant amount of disposable income each month (money remaining after you pay your monthly bills), you might not qualify to receive a Chapter 7 discharge—even if you pass the means test.

That doesn't mean you're without options. Instead, you can file for Chapter 13 bankruptcy and use those funds to pay your creditors over the course of a three- to five-year repayment plan.

What Should I Watch Out For If I Receive Social Security Income and File for Chapter 7 Bankruptcy?

Although your Social Security income won't count when qualifying for Chapter 7, unspent Social Security funds could be problematic. Social Security funds are exempt or protected, so you shouldn't lose the money theoretically. However, that's not always the case. Find out more about exempting Social Security Income in bankruptcy.

Combining or "comingling" your Social Security funds with other funds in a single account negates the exemption protection. You won't be able to prove which funds are exempt. You can avoid this problem by opening a dedicated account for Social Security income deposits only.

Also, you might be unable to exempt a large, lump-sum payment. If you plan to file for bankruptcy and receive Social Security income, consider speaking with a bankruptcy lawyer.