Many people who receive Social Security benefits live on fixed or limited incomes. As a result, they may need to borrow money when faced with unexpected expenses. Repaying that money on a tight budget can be challenging, and debt can pile up quickly. Bankruptcy is one possible way to relieve that debt burden. Fortunately, in most cases, filing bankruptcy won’t affect your Social Security benefits. In bankruptcy, some Social Security benefits are treated as income, while others are treated as assets. This article covers which benefits are considered income and how that income can affect your bankruptcy. It also covers which benefits are considered assets and how you can protect them.
Written by Attorney Paige Hooper.
Updated July 26, 2023
Social Security Benefits as Income
Ongoing Social Security benefits — the benefits you receive each month — are usually treated as income under bankruptcy law.
Your ongoing benefit payments are considered income for purposes of calculating your projected monthly income as determined by Schedules I and J of your bankruptcy forms. Your projected monthly net income is equal to all of your ongoing monthly income minus all the monthly expenses you will continue to pay after you file bankruptcy.
In Chapter 13 bankruptcy, your monthly net income is often the starting point for determining how much you’ll pay into your repayment plan each month. In Chapter 7 bankruptcy, if your monthly net income shows that you can afford to make meaningful payments to your unsecured creditors, the bankruptcy trustee could ask the court to convert your case to Chapter 13.
Income and Bankruptcy Eligibility
However, your ongoing benefit payments are not considered income for purposes of determining whether you qualify to file bankruptcy (under Chapter 7) or your bankruptcy repayment plan length (under Chapter 13). The Chapter 7 means test forms, and their Chapter 13 equivalents, specifically instruct debtors not to include any Social Security benefits when calculating income on the forms.
You’ll continue to receive your ongoing benefits after filing bankruptcy. The bankruptcy won’t cause any interruption in your payments.
Where To Disclose Your Social Security Income on Your Bankruptcy Forms
You’ll need to disclose your ongoing Social Security benefits on Line 8e on your Schedule I form to calculate your projected monthly income. If you’ve received Social Security benefits in either of the past two years, you’ll also need to disclose that on Question 5 on your Statement of Financial Affairs form. If your benefits are directly deposited onto a card via an Electronic Benefits Transfer (EBT) account, you must include that account on Line 17 on your Schedule A/B form. You may also need to provide evidence of your Social Security income, such as a benefit verification letter, to the trustee.
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Social Security Benefits as Assets
When you file bankruptcy, everything you own at that moment (your assets) becomes a part of your bankruptcy estate. Future Social Security payments generally aren’t part of your bankruptcy estate because they haven’t been paid to you yet. Likewise, benefits you receive after filing bankruptcy aren’t usually part of your bankruptcy estate.
But there is an exception for retroactive payments — benefits that were supposed to have been paid to you before you filed bankruptcy. Retroactive payments that you’ve been awarded usually are an asset of your bankruptcy estate, even if you haven’t received them yet when you file bankruptcy.
When Your Benefits Are Considered Assets
Social Security benefits that are considered assets of your bankruptcy estate include:
Monthly benefit payments, or any portion of those payments, you’ve already received but haven’t spent yet.
For example, if you received a $1,000 benefit payment last month and so far you’ve spent $700 of that money, the remaining $300 would be considered an asset.
Lump-sum retroactive benefit payments you’ve already received, but only to the extent that you haven’t spent them yet.
For example, if you received a lump-sum retroactive payment of $10,000 six months ago and you still have $2,000, only the $2,000 is considered an asset in bankruptcy. If you received a retroactive payment of $10,000 last year and you’ve spent it all, it’s no longer considered an asset.
Any retroactive lump sum benefits that you’ve already been awarded but haven’t yet received.
Where To Report These Assets on Your Bankruptcy Forms
If you have Social Security benefits that qualify as assets, you must disclose them in your bankruptcy paperwork.
Any benefits that are currently in a checking or savings account, including an EBT account, must be included on Schedule A/B, Line 17.
Any retroactive benefits that you’ve already been awarded, but haven’t yet received when you file bankruptcy, must be included on Schedule A/B, Line 30.
Any benefits that you include on Schedule A/B must also be included on Schedule C if you are claiming them as exempt (more about exemptions below).
How To Protect Benefits That Are Considered Assets
In Chapter 7 bankruptcy, the bankruptcy trustee can, in theory, liquidate (sell) the assets in your bankruptcy estate to pay your creditors. Exemption laws allow you to protect some or all the assets in your estate from liquidation by the trustee. Most people who file Chapter 7 bankruptcy can claim all their assets as exempt, meaning the trustee doesn’t liquidate anything.
Every state has a set of exemption laws. There are also federal bankruptcy exemptions. Where you live and how long you’ve lived there determine which exemption laws you may use. There are also federal non-bankruptcy exemptions, which you can claim in combination with any state’s exemptions.
Commingled Benefits: A Potential Complication
Social Security benefits are considered to be commingled when they’re kept in the same bank account as money from other sources, such as wages or pension payments.
Example: On March 1, $800 of Social Security benefits were deposited into your bank account. On March 2, an $800 pension payment was deposited into the same account. On March 3, a store credited the account with $100 for items you returned. On March 4, you paid $1,000 out of the account for rent. Of the $700 left in your account, how much is Social Security income, pension money, or refund credit?
As you can see, when funds from different sources are mixed together in the same account, it can be impossible to determine which money is being used. And consequently, it can be challenging to determine what exemption laws, if any, apply to the money that remains in the account.
How To Protect Commingled Benefits
Traditionally, under most state exemption laws, the person claiming a Social Security exemption was required to prove that the money in question was traceable to Social Security benefit payments. States have created different rules for tracing money back to its source, but if a debtor couldn’t adequately trace the funds, they lost the exemption. Some states went a step further and said that benefits automatically lost their exempt status if they were commingled with money from other sources.
In 2011, a new federal Treasury Department rule concerning bank garnishments specified that commingled Social Security benefits do not lose their exempt status. The rule didn’t specifically address bankruptcy. But most bankruptcy courts now hold that, while commingled Social Security funds don’t automatically lose their exempt status, they must still be traceable to be protected under the Social Security exemption.
How To Avoid Commingling Issues
Tracing these benefits is no simple task. The best way to avoid this issue is to keep Social Security benefits in a designated account, separate from other kinds of income. Having benefits deposited onto an EBT card is another excellent way to prevent any confusion.
What can you do if your Social Security benefits are already commingled with other money in your bank account?
If you haven’t filed bankruptcy yet, you can open a new account that will only contain Social Security benefits. If you have benefits remaining in the old account, you can spend them on living expenses and necessities.
If you’ve already filed bankruptcy, it’s too late to try to separate your existing benefits. If you can’t trace your benefit amounts under your state’s tracing rules, you may still be able to protect the money in the account using a different exemption, such as a wildcard or personal property exemption.
If the benefits in your possession still aren’t covered under any available exemption, you may have to turn them over to your trustee (in a Chapter 7 case) or pay an equivalent amount to your unsecured creditors through your repayment plan (in a Chapter 13 case).
Ongoing Social Security benefits that you haven’t received yet are treated as income in bankruptcy. These benefits are used to calculate your projected monthly income, but they won’t affect whether you qualify for Chapter 7 or the length of your Chapter 13 plan.
Any Social Security benefits in your possession at the time you file bankruptcy are considered assets of your bankruptcy estate. This includes retroactive benefits you’ve been awarded but haven’t yet received. You can protect these assets from liquidation by claiming them as exempt under the applicable exemption laws. Claiming your benefits as exempt is more difficult if they’re commingled in an account with money from other sources. Keeping your Social Security benefits in a separate account can eliminate this problem.
- From the U.S. Government Publishing Office, www.gpo.gov. (2022, October). Title 11 - BANKRUPTCY. United States Code, 2011 Edition. Retrieved October 25, 2022, from https://www.govinfo.gov/content/pkg/USCODE-2011-title11/html/USCODE-2011-title11-chap5-subchapII-sec522.htm
- From the U.S. Government Publishing Office, www.gpo.gov. (2022, October). Title 42 - THE PUBLIC HEALTH AND WELFARE. United States Code, 2010 Edition. Retrieved October 25, 2022, from https://www.govinfo.gov/content/pkg/USCODE-2010-title42/html/USCODE-2010-title42-chap7-subchapII-sec407.htm