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Social Security Mailbox

Are Benefits Counted as Income in Bankruptcy?

Generally payments are protected, but not always

En español | Q. I filed for Chapter 13 bankruptcy after being laid off. Do Social Security benefits count as income in bankruptcy, or are they protected?

A. Federal law says your benefits are protected. On several occasions, Congress has made it clear that Social Security benefits are excluded from the financial assets that are used to repay creditors in a bankruptcy case.

See also: Avoiding bankruptcy.

Meanwhile, the Social Security Administration (SSA) says it will not honor court orders to hand over anyone's Social Security benefits to a bankruptcy trustee.

"It seems clear that Congress fully intended to leave Social Security income off the table, as a core policy decision," Missouri bankruptcy attorney Wendell Sherk wrote in an article on the Bankruptcy Law Network website.

In an interview, Sherk said that Congress spoke on the issue in the 1935 legislation that created Social Security, again in the sweeping 1983 amendments to Social Security and most recently in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Packing the repayment plan

The 2005 act, Sherk said, made it more difficult for individuals to declare bankruptcy. But the act also reinforced long-standing congressional rules protecting Social Security benefits.

Yet there are Chapter 13 bankruptcy cases in which Social Security benefits are included in repayment plans.

Sherk suggests that bankruptcy trustees, who represent creditors, may try to pack as many assets as possible into a repayment plan. If the debtor doesn't challenge it, the benefits may remain in the repayment plan.

It's unclear how often Social Security is included, but it's often enough that courts have been asked to rule on the legality of the practice. In two separate cases recently, the U.S. Court of Appeals for the 8th Circuit and one of its appellate panels ruled that Social Security benefits were off limits in bankruptcy cases.

Next: Social Security isn't counted as disposable income. >>

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