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What happens to Social Security benefits in bankruptcy?

On Behalf of | Oct 28, 2021 | Chapter 13 Bankruptcy, Chapter 7 Bankruptcy |

Filing for bankruptcy can be a difficult decision for many Memphis-area residents, and especially when part of the household income is Social Security benefits. There are many people in the region who are apprehensive about actually filing for protection from creditors. However, sometimes bankruptcy is absolutely necessary in certain situations. One thing that those on Social Security should understand is that income benefits are considered an “asset” in the legal system, and not earned income that is included when qualifying for either Chapter 7 or Chapter 13 bankruptcy. This is typically an advantage for the petitioner when the case is finalized, but there are cases where they can still be classified as household income.

Mixing incomes can be a problem

There are some cases where bankruptcy judges will take exception to exempting Social Security benefits from total income. This generally applies when a recipient or their spouse is also still working and earning an income other than Social Security. Combining Social Security benefits with actual earned incomes can still affect a bankruptcy petition approval, but separate and detailed bookkeeping can help protect Social Security benefits from attachment.

How to maintain exemption status

The most effective method of making sure Social Security benefits are excluded as income in a potential bankruptcy case is maintaining two bank accounts. One can be specifically focused on Social Security deposits and paying bills for household budget purposes. Married couples can maintain separate accounts as well in certain situations, and sometimes it may even be best for one spouse to file separately when financial holdings are not inextricably mixed. While separate banking accounts may not be sensible for some households, having a separate business account can help significantly any time personal business cash flow is part of the household income equation.

It is always best for potential petitioners to prepare for bankruptcy well in advance of actually filing whenever possible. There are also other factors that can impact benefits exemption as well, including total household income and the number of people in the household.