Does Bankruptcy Impact My Social Security?

Chapter 11 is likely the term you most commonly associate with bankruptcy. However, Chapter 11 of the Bankruptcy Code is meant for corporations or businesses. It allows the business to restructure with a plan to repay its creditors.

If you are wondering if declaring bankruptcy can impact your Social Security benefits, the chapters that will likely be relevant to you are 7 and 13. We will go over both and then explain what happens after you declare bankruptcy while you are receiving Social Security.

Chapter 7 

When you declare Chapter 7, you are eliminating either a significant portion or all of your debts. In exchange for this, you will have to turn over some of your belongings to a bankruptcy trustee. This will not be someone you know or will appoint. The person who becomes your bankruptcy trustee is appointed by the United States Trustee and is an officer of the Department of Justice.

If you’re asking what “some” of your property means, then you need to understand the “means test.” This is a test to determine whether your income is low enough to declare Chapter 7. The purpose is to ensure that people with high incomes don’t file bankruptcy under this chapter.

Chapter 13 

If you exceed the monetary threshold for Chapter 7, then you will move to Chapter 13. The key difference here is that you will maintain possession of all of your property after you file. However, you have to enter into a repayment process that can last as long as five years and as little as three. 

How Bankruptcy Impacts Social Security

If your primary means of income is Social Security then you may be wondering what happens to it when you file for bankruptcy. People on Social Security are in the later stages of life, and it may not be feasible for them to work. It is easy to see how even a large medical bill could for someone in this position to consider bankruptcy. They get saddled with a debt they cannot afford to pay back.

Another reason they may worry is that they have limited assets. If they are living with a relative and don’t own a car, then what property could they surrender? This is why we outlined the differences between Chapters 7 and 13. The person who lives off Social Security is going to fall under Chapter 7. 

The Means Test

When you file for Chapter 7, you will have to undergo a means test. In short, they are to verify that you don’t make too much to qualify. This changes per geographical location because the cost of living varies. 

Social Security is viewed as an asset rather than as an income. Federal bankruptcy laws and some state laws declare that Social Security is an exempt asset. The exception to this is when you mix Social Security funds with other wages the money becomes commingled. A judge can rule that these monies are no longer exempt. 

Hedtke Law Group

If you are considering bankruptcy and are a retired individual on a fixed income, Hedtke Law Group can support you on the road ahead. We pride ourselves on delivering solutions to our clients that are unique and specific to their circumstances. Contact us online or call us at (909) 579-2233 to schedule a free case evaluation.