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Chicago Bankruptcy Lawyer > Blog > Bankruptcy > Does Bankruptcy Affect Social Security Payments?

Does Bankruptcy Affect Social Security Payments?


Technically, no. Social Security benefits and other retirement accounts, like IRAs and 401(k)s, are exempt assets in bankruptcy. The Bankruptcy Code usually doesn’t protect cash in checking accounts or other DDAs (demand deposit accounts). It also usually doesn’t protect short-term savings accounts. Retirement accounts are different. Usually, people sacrifice and save for decades to fund Social Security and other retirement accounts. Losing that money in bankruptcy would be devastating, both financially and emotionally.

However, if a trustee spots a liquid asset, like a savings account, and there’s any possible way to liquidate it, the trustee (persona who oversees a bankruptcy for a judge) usually goes down that road. Only a Chicago bankruptcy lawyer can truly protect your Social Security benefits and other valuable exempt assets. Attorneys enforce the written exemptions and also know how to use informal exemptions that aren’t recorded in the Bankruptcy Code.

Exempt Assets

The unlimited exemption usually applies to Social Security benefits and other retirement accounts. These accounts are exempt regardless of amount, if they’re earned accounts. Unearned or inherited accounts are subject to different rules. Usually, the debtor didn’t have to save and sacrifice for decades to obtain such accounts, so the same dynamics don’t apply.

Most Illinois exemptions are value-based. The exemption applies up to a certain dollar amount, and a Chicago bankruptcy lawyer must often advocate for the true amount. The motor vehicle exemption, which has a $2,400 ceiling, is a good example.

Initially, there’s a big difference between a vehicle’s blue book value and its as-is cash value. A 2015 Toyota might have a $10,000 blue book value. But an on-the-spot “we pay cash for cars in any condition” buyer might only pay $1,000.

Additionally, there’s a difference between value and equity. Most new cars have high values, but owners have almost no equity in them. The reverse is true for used cars. The vehicle is paid off but is almost worthless on the open market.

Trustees are on the lookout for exemption abuse. For example, if Tim converts his short-term savings account into a 401(k) shortly before he files bankruptcy, the trustee might try to force Tim to liquidate that 401(k), or at least any money Tim put into the account immediately prior to filing.

Protecting Exempt Assets

As mentioned, most checking and savings accounts aren’t exempt. Most people deposit Social Security funds into the same account with their wages or other income. To distinguish exempt funds from nonexempt funds, debtors must produce voluminous financial documents. A missed deadline could mean asset seizure.

A separate account avoids this problem. The Social Security funds in Account A are clearly and easily distinguishable from the wages in Account B. Always speak to a lawyer before moving money prior to a bankruptcy filing, in this way or any other way.

Other informal exemptions apply to other exempt assets, such as the best interest of creditors rule in an Illinois bankruptcy.

Assume Phil has a small lake house the written exemptions expose. However, the house needs considerable work. Because of the repair costs, along with auction fees and other sales costs, a liquidation sale would barely be in the black. The law prohibits the trustee from seizing Phi’s lake house, even though it’s a nonexempt asset. The liquidation wouldn’t give any money to the creditors and therefore a seizure isn’t in their best interests.

 Count on a Thorough Cook County Lawyer

No matter what kind of financial problem you are having, there’s usually a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.



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