Filing for Bankruptcy While on Disability? Here’s What You Need to Know

Disability benefits count as income, but they are handled differently from other income sources in bankruptcy. This article breaks down the key things you need to know if you receive disability payments and are thinking about filing for bankruptcy, including how to report your income properly and what steps you can take to protect your benefits.

Do I Need To Report My Disability Income in Bankruptcy?

Yes. You do have to list your disability income on two required bankruptcy forms that ask for information about your income. Specifically, these are the means test form and Schedule I.

However, the forms use the information differently.

• On the means test forms, you must report Social Security disability income, but it doesn’t count toward the final monthly income calculation. This means it won’t affect your eligibility for Chapter 7 or how long your Chapter 13 repayment plan must be.

• On Schedule I, you must list Social Security and VA disability income, and here, it does count when figuring out your total monthly income and whether you can cover your living expenses.

🔑 Bankruptcy filers list their disability income on both the means test form and Schedule I, but only Schedule I factors it into the calculations.

What Counts as Disability Income in Bankruptcy?

There are three main types of disability income. The first is paid under the Social Security Administration (SSA) and includes both Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI).

The second type of disability income is Veterans Affairs (VA) income, which is paid by the VA. Unlike Social Security disability benefits, this income doesn’t need to be listed on or included in the means test forms. VA disability income does need to be included on Schedule I though. 

The third is private disability insurance income, which isn’t covered in this article.

If you aren’t sure how your disability income should be reported, you can schedule a free consultation with a bankruptcy lawyer to get legal advice specific to your situation.

Why Do You Have To List Your Disability Payments on Schedule I?

SSDI, SSI, and VA disability benefits must be listed on Schedule I — along with any other sources of income — so the bankruptcy court can assess your monthly income.

This helps the court determine:

• In Chapter 7 bankruptcy, whether you can afford to keep (reaffirm) secured debts, like a car loan

• In Chapter 13 bankruptcy, how much you can reasonably pay into your repayment plan each month

If filers have any deductions taken from their disability payments, such as taxes or insurance, they also include those on Schedule I.

How Do Disability Benefits Affect a Chapter 7 or Chapter 13 Filing?

Your disability benefits generally won’t stop you from filing for Chapter 7 or Chapter 13 bankruptcy. However, they may play a role in determining whether you qualify for Chapter 7 or how much you must pay in Chapter 13.

👉 For Chapter 7, you’ll need to pass the means test, which compares your income to the median income in your state. The good news is that Social Security disability benefits (SSDI and SSI) and VA disability benefits are excluded from this calculation. Even though you have to list SSDI and SSI payments on the form, they don’t count toward the final means test number. VA disability benefits don’t even need to be listed.

👉 For Chapter 13, your total income — including disability benefits — helps determine how much you’ll need to pay in your repayment plan. Since disability benefits must be included on Schedule I, they can affect how much disposable income you appear to have, which may impact your monthly plan payments.

Can I Protect My Disability Benefits From Creditors or the Bankruptcy Trustee?

Many bankruptcy filers with disability benefits find their benefits are protected when they file bankruptcy. But this depends on the exemptions available in your state.

💡 Exemptions are laws that protect certain income and property from being taken by creditors or the bankruptcy trustee when you file for bankruptcy.

The federal government has a set of exemptions and so does every state. Some states allow you to choose between state and federal exemptions. No matter which system you use, your monthly payments are usually protected. 

However, if you have unspent disability benefits in a bank account, you may need to use a specific exemption — like your state’s protection for disability income or the federal wildcard exemption — to keep them safe.

✨To help protect disability benefits in bankruptcy, many filers choose to keep them in a separate bank account that only receives deposits from Social Security or VA payments. This makes it easier to prove the funds are exempt and prevents them from getting mixed with non-exempt income, which could make them harder to protect.

What If I Received a Lump-Sum Disability Payment?

Many people who file disability claims face long wait times. If you’re approved, you might receive a lump-sum payment to cover the months (or even years) of back payments you were owed. If this money is still in your bank account when you file for bankruptcy, it may not be automatically protected. You’ll likely need to use a bankruptcy exemption to keep it.

Will I Continue Receiving Disability Benefits If I File for Bankruptcy?

Yes, filing for bankruptcy won’t stop your disability benefits. SSDI, SSI, and VA disability payments are protected under federal law and can’t be taken away just because you file for bankruptcy.

However, if you owe back taxes, child support, or other government debts, a portion of your disability benefits could still be garnished depending on the type of debt. This is true whether or not you file for bankruptcy.

As long as you’re eligible for benefits, you should continue receiving payments as usual during and after bankruptcy. If you’re concerned about how bankruptcy might affect your benefits, consider speaking with a bankruptcy attorney or legal aid organization for guidance on your specific situation.

Let’s Summarize…

If you receive disability benefits, they can affect your bankruptcy in two main ways: how your income is reported and whether unspent benefits in your bank account are protected. Social Security disability (SSDI and SSI) benefits must be listed on bankruptcy forms but don’t count in the means test calculation. They factor into Schedule I, which helps determine your ability to cover expenses or make payments in a Chapter 13 plan. VA disability benefits don’t need to be listed on the means test form but also must be included on Schedule I.

Most ongoing disability benefits are protected in bankruptcy, but unspent funds — especially lump-sum payments — may require a specific exemption to remain safe from creditors.

If you need help understanding how disability benefits impact your bankruptcy case, consider talking to an attorney. Upsolve can connect you with a local bankruptcy lawyer for a free consultation. You can also see if you’re eligible to use Upsolve’s free filing tool to file your Chapter 7 case and move toward a brighter financial future.