How Does Filing Bankruptcy Affect Social Security Benefits?

The short answer to how filing for bankruptcy will affect your Social Security benefits is that it won’t: Social Security benefits are considered exempt income, and that translates into them being protected from creditors, no matter how much you owe. They are viewed in an entirely different way from any income that you earn or other monetary (or physical) assets that you will be required to list on your application.

When you file for bankruptcy, you will be required to provide a comprehensive list of all of your assets, income, and debts. The bankruptcy court will review all of this information and apply it to a means test that determines exactly how severe your financial situation is. If the means test establishes that your income level is below that of the median income for a household your size in your state or jurisdiction, you will likely qualify to file for a Chapter 7 bankruptcy, which will discharge almost all of your debt. People whose median income is above this threshold will be directed to a Chapter 13 bankruptcy, which establishes a payment plan that is in keeping with their ability to pay, and which may arrange for some debt to be discharged or credit terms to be revised.

It is important to note that when the means test is calculated, Social Security benefits are included. Though they can’t be garnished for a  Chapter 7 bankruptcy, if they lift you into a Chapter 13 bankruptcy then they can be used to calculate your repayment plan.

Monies that you have in qualified retirement plans are also protected from forfeiture in bankruptcy. If you have a 401K or 403B account, individual IRAs, or Roth IRAs, you will likely be able to hold onto them in a Chapter 7 bankruptcy. The same is not true for nonqualified retirement plans, though if you have more than the set exemption limit of just over $1.5 million in these accounts, the surplus might be available to creditors, and if your savings are withdrawn, they become available to pay off your debts in a Chapter 7 bankruptcy.

It’s important for you to understand that the protections of your accounts offered by Chapter 7 are altered by qualifying for Chapter 13: If you have a stream of income from any of these retirement accounts (including Social Security benefits), you may be required to use that income towards a Chapter 13 repayment plan.

To learn more about the complexities of a bankruptcy filing, contact our experienced attorneys today to set up a time for us to meet.