Choosing to file for bankruptcy is not an easy decision. But for some people, it is their best option. When you make the choice, you’ll have many questions – what will you be able to keep and what will you have to give up? For those receiving Social Security benefits, they want to know what will happen to them.
Generally, benefits are exempt from bankruptcy
Under 42 U.S. Code Section 407, Social Security benefits, whether for retirement or disability, are not subject to garnishment or bankruptcy. For Chapter 7 bankruptcy proceedings, you must first pass a means test to qualify – but if Social Security is your only source of income, chances are you’ll pass easily. Once you do, most creditors will be unable to touch your benefits to satisfy outstanding debts.
There are, however, some exceptions to the rule that benefits can’t be touched. Most of them involve obligations enforced by the government. Taxes, alimony and child support are good examples. Social Security benefits can be withheld or garnished in order to satisfy these types of debts.
The other issue Social Security recipients need to worry about, if they’re considering bankruptcy, is commingling funds. Although most creditors can’t touch benefits, you do yourself no good if your benefits can’t be identified as such. People can get themselves in trouble by comingling the money from their Social Security checks with money coming from other, unprotected sources. If a bankruptcy court is unable to distinguish the two, the benefits are at risk. Your best bet is to ensure your benefits are deposited into a separate and easily identifiable account, so that they remain protected.