Many times, individuals whose only income is Social Security Disability Insurance benefits (SSDI) have difficulty keeping up with paying creditors and debts and may have to file for Chapter 13 bankruptcy
. There can be a deep internal struggle with choosing this path due to the fear of losing their SSDI benefits.
The Social Security Act provides protection to Americans who become disabled and have worked long enough and paid Social Security taxes. Disability benefits are available to those (previously and currently) employed workers and their survivors who have paid into the system and can no longer work. These benefits, although helpful, equate to only a portion of what a working individual previously earned.
If an individual receives approval to collect disability benefits, the amount of the benefit is not determined by the severity of the disability or their earnings when they were employed. The Social Security Administration calculates the amount of Social Security taxes an individual has paid on their income over the many years they’ve worked and averages them. A formula is applied to this average using percentages called “bend points." As a result, any person's benefit payment will only amount to a percentage
of what their earnings were while working. Payment benefits paid to individuals and/or their survivors through SSDI payment ranged from $700-$1,700 per month in 2017.
In almost all cases, this protection will not
be overruled by bankruptcy
. The most common protection for these benefits, by statutory definition, is that Social Security income is excluded as income being available to repay creditors. In other words, these benefits are not calculated as disposable income or financial assets to determine payment amounts used to pay back unsecured creditors.
42 U.S.C. 407 (Section 207 of the Social Security Act) provides protection in the form of a broad federal non-bankruptcy exemption. The statute provides that “none of the monies paid or payable or rights existing under this subchapter [of the Social Security Act] shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of bankruptcy or insolvency law.” Other federal laws allot exceptions to this protection outside of bankruptcy for established child support or alimony
obligations, federal taxes or other obligations to the federal government. Most times, even debtors that have these responsibilities will still have protection of their benefits in bankruptcy. However, other bankruptcy laws, such as priority creditor laws, may require these responsibilities be paid from another income source.
To reiterate, in several instances, Congress has clearly stated that Social Security benefits should not be
included in determining financial assets that are used to compensate creditors in a bankruptcy case. Additionally, the Social Security Administration has said it will not honor court orders to turn over an individual’s Social Security benefits to a bankruptcy trustee.
The Social Security Administration has very strict guidelines on what their benefits can be used for as they were created to assist disabled individuals with basic needs such as food, clothing and shelter. Because of this, you should keep your SSDI benefits in a separate checking or savings account and keep accurate records of income and expenses, so they are traceable. Commingling of your household income and your Social Security Disability benefits may cause confusion and complications. Keeping these monies separate will help you avoid losing protection of those benefits.
Still have unanswered questions or have a unique case not addressed here? Please schedule a free consultation
with Veitengruber Law in Bordentown or Wall, NJ to learn how you can continue to receive your income from disability payments while filing for bankruptcy.
Image: "Surprise" by Tobias Scheck - licensed under CC 2.0