AARP Hearing Center
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, however, an important exception 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.
