Will I Lose my Social Security Benefits if I File Chapter 7?
Statistically, many older people are in more debt than ever. The over-55 bankruptcy filing rate has increased 50 percent in recent years, even as the overall bankruptcy filing rate has reached historic lows. Furthermore, most seniors who file bankruptcy owe more than $101,000, which is more than three times their average annual income.
For many people, even those with substantial retirement savings, Social Security payments account for most of their monthly income. If debtors believe this income stream is at risk, they understandably hesitate to file necessary bankruptcies.
Fortunately, both the Social Security Administration and the Bankruptcy Code are clear that Social Security benefits are exempt assets, even if they come in the form of monthly payments. This fact puts many minds at ease and allows more people to take advantage of bankruptcy.
Why File Bankruptcy?
Most seniors, and most debtors in general, file bankruptcy because of the Automatic Stay. Section 362 of the Bankruptcy Code immediately stops most forms of creditor adverse action, such as:
- – Lawsuits,
- – Foreclosure,
- – Creditor harassment, and
- – Repossession.
Moneylenders can only bypass the Automatic Stay if they convince the judge that their collateral is at risk (e.g. the debtor threatens to burn down the house).
Chapter 7 has other benefits as well. Most of the filer’s unsecured debts are discharged in a matter of months. Unsecured debts include things like credit card bills and medical expenses. Other unsecured debts, such as back taxes, are also dischargeable in many cases.
Potential discharge gives bankruptcy attorneys negotiating leverage with creditors. Medical billers and other creditors know they must strike a favorable deal on things like a reduced interest rate. Otherwise, the debtor will include the account in bankruptcy, and the moneylender gets nothing.
Exempt Assets in a Chapter 7
Social Security benefits, a category which usually includes both age-based SSI and disability-based SSD, are not the only exempt assets in a Chapter 7. Other potential exemptions include:
- – Home equity,
- – Personal property,
- – Motor vehicles, and
- – Cash in a savings or checking account.
Chapter 7 discharges unsecured debts, but it does not discharge secured debts. In most cases, debtors who wish to retain houses, cars, and other secured property must keep making payments, even while the bankruptcy is pending.
Preserving the Social Security Exemption
Typically, wages, dividends, and other forms of income are not exempt. If the debtor combines exempt and nonexempt funds in the same account, which is common, the funds become commingled.
Generally, debtors can go through their back statements and clearly identify what funds are exempt and what funds are non-exempt. At best, this exercise is extremely time-consuming. And, the Social Security exemption does not always apply to commingled funds.
So, if you are considering bankruptcy and you receive Social Security, Veterans Administration, workers’ compensation, or other government benefits, it might be a good idea to place such funds in a separate account. That move effectively solves any commingling problems.
A word of caution. Always, always speak with a bankruptcy attorney before you move any money.
Connect with Assertive Lawyers
Social Security benefits are usually untouchable in bankruptcy proceedings. For a free consultation with an experienced Chicago Chapter 7 bankruptcy attorney, contact the Bentz Holguin Law Firm, LLC. After-hours visits are available.