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Chicago Bankruptcy Lawyer > Blog > Bankruptcy > Does Bankruptcy Protect Social Security Benefits?

Does Bankruptcy Protect Social Security Benefits?


In a word, yes. Generally, bankruptcy exemptions protect property, but they don’t protect income. According to the Social Security Administration, Social Security benefits are property, even though these benefits come in monthly installments, like income. So, even in the unlikely event trustees (people who oversee bankruptcies for judges) try to seize these benefits, the SSA would most likely block such a move.

However, in property seizure cases, a Chicago bankruptcy lawyer, not a government bureaucrat, is a debtor’s first line of defense. Generally, a lawyer is also the only necessary line of defense. Attorneys help ensure that debtors get the fresh financial start the Bankruptcy Code guarantees. That’s true in both Chapter 7 cases, which are designed for people with high medical bills and other excessive unsecured debt, and Chapter 13 cases, which help people who are behind on home mortgage payments and other secured obligations.

Automatic Stay

As outlined below, property exemptions aren’t the only protections for Social Security benefits in bankruptcy cases. The Automatic Stay applies as well. Generally, Section 362 of the Bankruptcy Code prohibits wage garnishment and other creditor adverse actions.

FSO (family support obligation, mostly alimony and child support) and back tax garnishment are the two most common kinds of benefit garnishment. Some civil penalties under the Mandatory Victim Restitution Act, which is basically a crime victim restitution law, are available as well. Usually, the taxing authority, family court, or other garnishing body can withhold up to 25 percent of Social Security benefits.

The Automatic Stay is, well, automatic. The garnishment order could be perfectly legitimate. Nevertheless, it’s still illegal under Section 362 of the Bankruptcy Code.

Garnishment prohibition also gives a Chicago bankruptcy lawyer a chance to negotiate with a creditor regarding the tax debt or other debt. If debtors file bankruptcy, a judge usually supervises these negotiations, to ensure that both sides negotiate in good faith.

Property Exemption

Social Security benefits, like workers’ compensation payments and most other government benefits, are exempt in Illinois and all other states. Similar exemptions usually apply to personal injury settlement funds.

Things get a bit tricky if, as is usually the case, the debtor deposits wage income and Social Security benefits into the same account. If funds are commingled, it’s more difficult to separate nonexempt wage income from exempt Social Security benefits. Frequently, trustees demand that debtors turn over all the funds in their bank accounts, regardless of the source.

To maximize the property exemption and avoid this confusion, it’s usually a good idea to separate Social Security benefits and wage income, or other kinds of income, into separate accounts. Always speak with a lawyer before making such a move, as it could be considered evidence of bankruptcy fraud.

Connect With a Diligent Cook County Lawyer

No matter what kind of financial problem you are having, bankruptcy could be a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Virtual, home, and after-hours visits are available.



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