If your sole source of income is Social Security retirement income, disability benefits, or other federal benefits, you’re judgment proof. As a result, a creditor can't secure a garnishment order or take money from your bank account.
Written by Attorney Kassandra Kuehl.
Updated July 22, 2020
If you receive Social Security disability benefits, you’re likely (and very understandably) protective of your entitlement. As a result, it’s important to understand whether Social Security benefits are generally safeguarded from garnishment under the law or whether a portion of your benefits may be claimed by creditors to pay down your debts. Familiarizing yourself with your rights will help you make sound personal finance and debt management decisions now and moving forward.
What are Social Security Benefits?
There are 3 primary kinds of Social Security benefits distributed by the federal Social Security Administration to eligible members of the American public:
Supplemental Social Security Income (SSI) – Payments to disabled persons and adults over the age of 65 who meet income limits
Social Security Disability Insurance (SSDI) – Payments to adults who are restricted in their ability to work due to notable disability
Social Security Retirement Benefits – Replacement income for eligible retirees and their families
All Social Security checks are issued by the federal government to eligible individuals who meet strict regulatory criteria. Nowadays, monthly payments are directly deposited into a bank account or onto a debit card issued by the federal government.
Are My Social Security Benefits Safe from Creditors?
When consumers secure lines of credit or take out loans, they are legally required to pay their creditors or debt collectors back per the terms of their lending agreements. When an individual’s financial situation leads to missed payments or default on an account, the debt collector or creditor that is owed money is generally allowed to sue the borrower and to obtain a judgment against that individual. These court judgments may result in:
Garnishments – A court order that a portion of an individual’s income or property may be sent directly to a creditor instead of going to the individual (such orders are usually applied to earned, employment-based income, not entitlements, benefits, alimony, or child support).
Bank Account Levies – A court ordered debt collection in which a bank is instructed to withdraw money from a debtor’s personal bank account without the debtor’s permission; the funds are used to pay back creditors.
What Does Being Judgment Proof Mean?
It’s important to understand that some individuals are “judgment proof” when it comes to garnishments and bank account levies. Essentially, these individuals have very little income, do not have any wages available to garnish, and only own legally protected assets. If your sole source of income is Social Security retirement income, disability benefits, and/or other federal benefits, you’re likely to be considered judgement proof by the court. As a result, a law firm for a collection agency or creditor cannot secure a garnishment order, nor can they take money from your bank account, even if they somehow secured a bank account levy.
If you’re judgment proof, it’s important that you always be very careful not to commingle your Social Security income, disability income, and other entitlement or benefits funds with other types of retirement benefits (including private retirement accounts) as that could complicate your situation and render some portion of your overall account subject to debt collection by credit card companies, collection agencies, and other creditors. If that happens, you’ll need to navigate a legal hearing to sort out the complexities and that is a situation best avoided. To protect your entitlements and other assets, keep them separate at all times.
Being judgment proof does not mean that your debts disappear or that you don’t have to find successful ways to manage them. Your overdue balances and collection activity will be noted on your credit report and may hurt your credit score. Being judgment proof means that it is essentially pointless for creditors and debt collectors to sue you for nonpayment because your debt is uncollectible. However, this reality probably won’t dissuade creditors and debt collectors from using other debt collection strategies, including nagging phone calls, letters, and seeking monthly payments from you, even if they can’t back up these efforts by seeking an actionable judgment against you in court.
Who Can Garnish Social Security?
It’s important to note that even if you’re judgment proof from collection agencies and creditors in general, you may remain subject to collection actions under federal law from a few entities. Specifically, if you owe money to the federal government or a state government, they can potentially collect from you without a court order in place.
The Internal Revenue Service can collect back taxes directly from your Social Security income and/or disability benefits. Even though it does not need a court order to take this action, the IRS must notify you via a letter that it is taking money out of your monthly entitlement.
Federal Student Loans
Similarly, federally backed student loan servicers can take money from an individual’s Social Security benefit award without a court order. Note that servicers may take this action against co-signers of federal student loans when the other party is defaulting on their student loan debt. Unfortunately, this scenario often affects grandparents who have co-signed for their grandchildren’s student loans.
Overpaid Federal Benefits
If, for any reason, you were ever overpaid federal benefits, the total overpayment amount can be garnished from your Social Security benefits award. This is frequently, and frustratingly, an issue for SSI recipients.
What Happens to Social Security in a Bankruptcy Case?
If you’re receiving disability benefits, you’re likely eligible to file for Chapter 7 bankruptcy. Seeking debt relief under Chapter 7 of the Bankruptcy Code will allow you to eliminate outstanding credit card debt, medical debt, and other eligible unsecured debt in as little as 90 days. If you choose to file for bankruptcy, you’ll need to make sure that your disability benefits are not commingled with other accounts, as commingling will complicate your case. For example, lump sums of disability income are generally treated as exempt as long these sums aren’t commingled with other funds.
Filing for bankruptcy can serve as an excellent debt relief solution to rid you of the burden of paying back credit card debt, medical debt, and other unsecured accounts you can’t afford to resolve on your own. Generally, Social Security benefits are treated as exempt and this form of income doesn’t “count against you” for the purposes of passing the Chapter 7 means test. As a result, this debt management solution may be worth exploring if you can’t afford to pay your unsecured debts and you’re living primarily off your Social Security disability benefits.
People with disabilities who receive SSDI or other disability benefits are generally judgment proof, save for actions taken by specific state or federal agencies to resolve government debts like back taxes and federal student loans. In the event that you receive notice that your benefits are being garnished, read the notice carefully to better understand why the government is taking a portion of your funds. You can always choose to seek legal advice if you have questions about your specific situation. Finally, it’s important to remember to keep your benefits in a separate bank account from other accounts so that they aren’t commingled. Commingling can lead some portions of your entitlement-based account to become subject to levy, which is a situation you’ll want to safeguard against.