Social security benefits are often considered exempt from bankruptcy and they are considered protected from bankruptcy. You can hold onto your Social Security benefits if you are filing for bankruptcy and it doesn’t matter where you live in the United States. In order to protect the maximum out of your Social Security benefits, you need to consider maintaining your benefits in a separate account. Once your benefits comingle with other funds that you have access to, it could become more difficult to prove that these funds came from a Social Security source and it may give a creditor the chance to seize the funds from your account. 

How a Chapter 7 and Chapter 13 Bankruptcy Will Work

Considering the two main types of bankruptcy and how your finances will be affected can be important. Chapter 7 and Chapter 13 bankruptcies have their own unique details:

Chapter Seven Bankruptcy

Under Chapter 7 bankruptcy you will be able to wipe out the majority of your debts by turning over likely the majority of your assets and property to repay your creditors. You will be able to exempt certain items under Chapter 7 bankruptcy but you must pass a means test in order to qualify for this bankruptcy type. A Chapter 7 means test will take a look into your income and expenses and determine whether you would be unable to pay off your debts. If you qualify for Chapter 7 bankruptcy a wide range of your debts will be forgiven. 

Chapter 13 bankruptcy is designed if you are unable to qualify for a Chapter 7 discharge. Under Chapter 13 bankruptcy you’ll be able to keep all of your property and establish a 3 to 5-year repayment plan for your debts. Part of your debts may be forgiven under this plan but you will need to demonstrate that you have a sufficient income in order to make the monthly plan repayments. 

Bankruptcy and Property

As you are qualifying for bankruptcy you will also need to list all of the property and assets that you own in a bankruptcy petition. It doesn’t matter whether you have extra funds sitting in a safety deposit box or in a shoebox at home, you need to report any extra property like cash, investments, property, collectibles, jewelry, and even specialty assets like exotic pets. 

Your Social Security Benefits Will Be Exempt

Social Security benefits are likely considered exempt from your property in any bankruptcy proceeding. Every state has their own set of laws regarding how much property you’ll be able to keep in bankruptcy but as long as you are only trying to hold onto a few household items, your family primary residence, and a modest car it’s likely that you’ll be able to hold onto all of these assets. A chapter 7 bankruptcy trustee will be responsible for liquidating all of the non-exempt property and then distributing the proceeds amongst your creditors. As long as you are keeping your Social Security funds separate they will remain exempt no matter where you are living and no matter what other assets you have access to.

Make Sure Your Funds Do Not Co-Mingle

Certain funds remain exempt from your bankruptcy but it’s your responsibility to prove that you have the right to retain the money that’s in the account. Even though you claim a portion of your bank account balance you may be exempted from Social Security benefits, it doesn’t mean that a bankruptcy trustee will trust you completely. Co-mingling your finances will make it very difficult to prove where you received the funds from.

It’s wise to consider opening up a separate bank account that will exclusively be for your Social Security benefits. This allows for a traceable source of the funds as well as an automatic deposit. Even if you aren’t contemplating bankruptcy, it’s easier for you to protect your Social Security money from any type of collection effort. If you’re starting to experience difficulty with debts it’s a much wiser decision to have a separate account for any Social Security benefits. 

Before You File

If you haven’t filed for bankruptcy yet you should consider opening an account that you’re going to use primarily for Social Security benefits. Exhaust the co-mingled funds in your account from Social Security benefits before you file for bankruptcy so that you can pay for basic necessities like your utilities, food, and rent/mortgage payments. 

After You File

If you’ve already filed for bankruptcy and you cannot exhaust the co-mingled funds you should consider speaking to a lawyer about another type of exemption that you could consider. It’s possible that you could qualify for a wild-card exemption with your co-mingled funds which would allow you to protect more of the property that you own or a certain amount of cash that you hold from the Social Security funds inside your account. 

If you need advice on how you can protect your Social Security funds, contact us today.