Does Bankruptcy Affect My Disability Benefits?

If you receive disability benefits, it makes sense for you to wonder how a bankruptcy filing might affect your benefits. After all, what good is a bankruptcy discharge if you lose your (possibly only) source of income?

The first question you have to answer is what type of disability benefits do you receive. Social Security Disability Insurance (SSDI) and Supplement Security Income (SSI) is protected from your creditors by federal law. This is true both outside of the bankruptcy context and upon filing for bankruptcy relief based on federal bankruptcy exemptions.

Generally speaking, bankruptcy has very little impact on your social security disability benefits. This is true for both the ongoing monthly income you are receiving (and will continue to receive), disability benefit funds you have set aside in your bank account on the date your case is filed (as long as the funds have not been mixed with other monies), and lump sum payouts of disability benefits you are expecting in the future. If you know you might receive a lump sum payout in the future, it is critical that you disclose this asset on your Schedule B, and claim the correct exemption on your Schedule C. Check out this post to learn more about how to handle your social security benefits - including your social security disability benefits - in your Chapter 7 bankruptcy.

Caution: If you have federal tax debts, defaulted federal student loans, or if you are seriously delinquent on your child support obligations, the Department of Treasury can garnish your social security disability benefits. Since child support and recent tax debts are generally not dischargeable in bankruptcy, make sure you have a plan to deal with these debts once you have received your discharge and your automatic stay protection by the bankruptcy court has ended.

What if my disability benefits are from a source other than social security?

Social security is not the only source of disability income. Specifically, you may receive disability income pursuant to either a short-term disability insurance policy or a long-term disability insurance policy. These policies are either provided by your employer (typically with a small part of the premium passed on to you) or you can purchase one on your own. Generally, this type of disability income is treated very similarly to federal social security disability benefits in bankruptcy, but there are some important differences.

Disability Benefits as Income

When it comes to the means test, disability income other than from social security is included in the calculation for your monthly income and that may impact your eligibility for a certain type of bankruptcy. You have to disclose your private disability income on Line 10 of the Chapter 7 Statement of Your Current Monthly Income and again on Line 8h of your Schedule I. If you know that your private disability benefits will expire in the next 12 months, make sure you indicate when you are losing this benefit when prompted to enter any expected changes in your income on your Schedule I.

If you received a lump sum payout from your disability insurance in the 6 months prior to filing, this may result in a finding that you are not eligible for Chapter 7. That is not the end of the road, however, as the large lump sum payment you received was a one-time occurrence. In other words, the fact that you received a lump sum disability payout in the 6 months before your bankruptcy is filed does not automatically disqualify you from filing a Chapter 7 bankruptcy.

Disability Insurance Funds as an Asset

Federal bankruptcy exemptions protect your disability income from sources other than social security and most states provide their own exemption laws to protect your disability income. Where it may become a little tricky is if you either have already received, or will receive, a lump sum payout of your disability benefits. Funds you receive before your bankruptcy case is filed may lose their exempt (protected) status either by getting commingled (deposited) with other monies, or possibly just by the passage of time.

If you are waiting on back payments from your disability insurance when you file your case, it is an asset that has to be disclosed on your Schedule B and claimed as exempt on your Schedule C. Either way - if you have a sizeable amount of disability insurance funds in your account now, or coming your way, we recommend that you speak to an attorney in your state to be sure you can maximize all of the bankruptcy protections available to you.