Keeping Social Security Benefits in Bankruptcy
Social Security retirement benefits and disability benefits enjoy broad protection in bankruptcy. The most commonly used protection for benefits is the fact that social security income is excluded by statutory definition from income available to repay creditors. This means it does not count in the means test for chapter 7 eligibility, and is not considered as income used to determine the amount to repay unsecured creditors in a chapter 13 bankruptcy.
Less appreciated is the fact that federal law also protects social security benefits already received. Instead of an income adjustment, this protection operates as an exemption, just like an exemption that provides a homestead allowance or a motor vehicle. Debtors who find this particularly advantageous are those owed a lump-sum payment under social security laws, or those who have an account with substantial social security deposits. In order to be able to claim an exemption in money already in an individual's possession, it is potentially important that the money is separate from other funds and directly traceable to social security. In other words, commingling of social security benefits and other money risks the ability to claim it as exempt under federal laws.
This protection is a broad federal non-bankruptcy exemption, provided by 42 U.S.C. 407 (Section 207 of the Social Security Act). The statute provides that "none of the moneys paid or payable or rights existing under this subchapter [of the social security act] shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law." Other narrow federal laws provide exceptions to this protection outside of bankruptcy for certain child support and alimony obligations, as well for certain federal tax and other obligations to the federal government. However, even debtors with these obligations will still receive protection of their social security in bankruptcy, although other bankruptcy laws, such as priority creditor laws, may necessitate these obligations be paid from some other source.