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Are my Social Security benefits at risk if I file for bankruptcy?

Generally, no. Congress has consistently made clear that Social Security benefits are exempt assets, meaning they cannot be tapped to repay creditors in a bankruptcy case.

There is an important exception, however, potentially involving situations where Social Security benefits have been commingled with other funds, such as in a bank account where your work income is deposited. To be certain that your benefits are protected, bankruptcy attorneys recommend setting up a dedicated account for them. 

Chapter 7 vs. Chapter 13

Bankruptcy is a process under federal law to reduce or eliminate debt when you are unable to pay your bills and have tried all other ways to get back on firm financial ground. Individuals filing for bankruptcy usually use Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code.

Chapter 13, also called the wage earner’s plan, enables individuals with regular income to develop a plan to repay all or part of their debts over time (usually three to five years). Most importantly, Chapter 13 provides a way for people to keep property like a vehicle or home and to stop creditors from garnishing wages while the plan payments are made.​

A Chapter 7 case is a liquidation by which the debtor’s nonexempt assets are made available to a trustee to be sold and distributed to creditors. It does not involve submitting a debt-repayment plan with the court, as in a Chapter 13 scenario. 

Federal law specifically excludes some income, including Social Security benefits of all types, from being paid to creditors. A bankruptcy filing automatically stays creditors from garnishing your wages and Social Security payments, and the Social Security Administration (SSA) says it will not honor court orders to hand over anyone’s benefits to a bankruptcy trustee.​

Benefit income must be reported

There are ways that your benefits could be involved in a bankruptcy filing, directly or indirectly. ​One is in reporting your income. Chapter 13 submission forms require you to take a “means test” to determine how your monthly income compares with the median in your state. This calculation also determines how much disposable income you have and is ultimately used to set the monthly payments that you will make to creditors. ​

You are required to include Social Security benefits in the income filing, on a Schedule I form, but they are not included in the calculation of disposable income payable in Chapter 13 cases.​

You also must list Social Security benefits on your Schedule I for a Chapter 7 filing, which are used to calculate your average monthly income and applied to the means test that determines whether you qualify to file under this chapter. The purpose of the test here is to prevent individuals from going into Chapter 7 bankruptcy if they exceed the income threshold for doing so, which varies by state. ​

But in a Chapter 7 filing, the court may determine that prior Social Security payments deposited into your bank account are part of the bankruptcy estate — that is, the property you own at the time of filing — and can be distributed to creditors, especially if they are commingled with other funds, like your wages, warns William L. Norton III, a Nashville bankruptcy attorney and coauthor of the Norton Creditors’ Rights Handbook

The issue does not come up in a Chapter 13 filing because the debtor keeps all assets while making repayments under a plan. In Chapter 7 cases, the bankruptcy trustee can take funds in a bank account to distribute to creditors.​

Disability back pay could be affected

Similarly, while your ongoing disability benefits will not be included in your bankruptcy, a trustee in a Chapter 7 case may go after unspent past disability payments and disability back pay that have been mixed with other money in an account. ​

People awarded Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) — the two SSA-administered benefits for people with disabilities — may receive lump-sum payments if Social Security determines they were medically qualified for benefits before their disability claims were approved.​

If commingled, this back pay could be considered property of the bankruptcy estate and distributed to creditors. Again, this situation does not apply in Chapter 13 cases because the debtor keeps deposited funds. 

Keep in mind

  • Laws in some states protect commingled funds in a bankruptcy case, but you may want to consult with an attorney on regulations where you live before beginning a Chapter 7 filing. 
  • There are Chapter 13 cases in which trustees seek to include Social Security benefits in repayment plans. Multiple federal court rulings have upheld the exclusion of Social Security benefits in Chapter 13 bankruptcies, so it’s important to challenge any such attempt.
  • Veterans’ disability benefits are afforded the same protection from bankruptcy proceedings as Social Security payments.

Published July 22, 2022