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Social Security and Bankruptcy

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Supplemental Security Income (SSI) benefits and Social Security Disability insurance (SSDI) benefits are generally reserved for people who are unable to pay all of their bills without governmental assistance due to disability, age, or other reasons for limited income. Citizens who have worked for at least 10 years and are at least 62 years old can obtain Social Security retirement benefits, although those benefits are typically not meant to be a recipient’s sole source of income. Regardless of the type of Social Security benefits a person receives, they may face pressure from sources of debt that they are unable to pay down. That debt may come from medical bills, credit cards, mortgages, or other sources. If you are struggling with debt and considering bankruptcy, what will happen to your Social Security benefits? Will your benefits be garnished in order to pay back debts? Continue reading to learn about how bankruptcy interacts with Social Security benefits, and call a knowledgeable Ventura debt relief and bankruptcy attorney for help with bankruptcy or other debt-relief options.

If You Receive SSI or SSDI, You Probably Qualify for Chapter 7

There are two main types of bankruptcy for dealing with consumer debt: Chapter 7 and Chapter 13. Chapter 13 bankruptcy is reserved for debtors who earn an income and can afford to pay back at least a reduced portion of their debt over time if they are given an extended period for repayment and more affordable monthly premiums.

Chapter 7 bankruptcy, on the other hand, is meant for individuals whose income is below a certain threshold and who are likely unable to pay back most or all of their debts, even given additional time. Chapter 7 bankruptcy wipes clean all covered debts, leaving the debtor with a fresh start. Individuals who qualify for SSI or SSDI, or whose sole source of income is Social Security benefits, will almost certainly qualify for Chapter 7 bankruptcy based on income. Most people who are entitled to SSI or SSDI benefits have an income well below their monthly expenses, leaving no additional income to pay debts as part of a Chapter 13 repayment plan.

Creditors Typically Cannot Reach Social Security Benefits

Creditors who obtain a judgment against a debtor can seek garnishment of the debtor’s wages, which means that they are entitled to a reserved portion of a debtor’s paycheck each month. Certain types of income are exempt from garnishment, however. Social Security benefits–including SSDI, SSI, and retirement benefits–are generally not subject to garnishment or attachment by a creditor.

There are certain exceptions. Social Security benefits may be garnished to pay back taxes to the IRS, to collect unpaid child support or alimony, and to pay certain court-ordered restitution.

Social Security Benefits Are Exempt from Bankruptcy

If you do file for Chapter 7 bankruptcy, you’ll need to list your assets for a potential liquidation. The bankruptcy trustee can collect non-exempt property in order to sell what is necessary to pay back as much of the outstanding debt as possible. The Bankruptcy Code includes a wide range of exempt property, however, which is protected from collection and sale as part of the bankruptcy process. Debtors in some states are entitled to rely on either the state exemptions or the federal exemptions, whichever they prefer. However, California filers must use the California exemptions which are generally better than their federal equivalent. In addition, California filers can use the federal nonbankruptcy exemptions for applicable assets.

Federal law and California law generally exempt Social Security benefits from bankruptcy. Regardless of state law, Social Security benefits cannot be collected and used to repay debts as part of a Chapter 7 proceeding. However, it’s important to keep Social Security funds separate from other funds to ensure they are protected; commingling Social Security funds in the same account with other sources of income can make it difficult to separate out the exempt funds, and the bankruptcy trustee might not agree with your assessment of which funds are exempt from collection.

Find Financial Freedom With Help From a Dedicated Southern California Debt Relief Attorney

If you are dealing with mounting debt and considering debt relief options including bankruptcy, please contact Rounds & Sutter for a free, confidential consultation. With offices in Ventura, Santa Barbara, and Westlake Village, we represent clients throughout Southern California, offering tried & true legal counsel in the face of life’s challenges.