How Do Your Federal Disability Payments Affect A Bankruptcy?

Whether you're facing potential bankruptcy while waiting on a pending Social Security Disability (SSD) claim, or are wondering if you can keep existing SSD payments while entering a Chapter 7 or Chapter 13 filing, you may be confused about how these payments are impacted in bankruptcy. Fortunately, disability payments and bankruptcy filings are both handled in the federal court system -- although there is still some variation among jurisdictions. Read on to learn more about how these areas of law intersect and how you can best protect yourself financially.

Can the receipt of SSD payments affect your ability to qualify for a bankruptcy?

In 2005, the federal government changed some bankruptcy laws and regulations in an attempt to limit fraudulent filings. One of these changes involved evaluating the monthly income of potential Chapter 7 filers -- if this income (minus some common deductions, such as health insurance and utility costs) was more than the median income in the individual's state, the bankruptcy court could choose to reject the Chapter 7 filing and instead only allow a Chapter 13 repayment plan. However, income derived from SSD payments is excluded from the income calculation -- so unless your spouse or other family member earns a relatively high income compared to others in your state, you will likely qualify for a Chapter 7.

If you'd instead like to file a Chapter 13 repayment plan, your SSD payments may be included as income -- depending on where you live. Currently, there are 24 states, including Michigan, Ohio, Texas, and Virginia, that will allow you to exclude federal disability benefits from your Chapter 13 income. In the other 26 states, including California, Indiana, Arizona, and Florida, the bankruptcy court will include disability payments when calculating the amount of income available to help pay back your creditors. Depending upon the amount of benefits you receive (in proportion to your total household income), you may find that a Chapter 7 discharge offers clear benefits over a Chapter 13 repayment.

Can filing a bankruptcy cut off your flow of disability benefits?

Whether you choose to file a Chapter 7 or Chapter 13, you may be concerned that having a bankruptcy on your record could limit your ability to continue to qualify for these payments. Fortunately, the federal government has listed disability payments as exempt from garnishment or seizure in a Chapter 7 bankruptcy. One thing you can do to make the filing process easier is to set up a separate bank account to process only SSD payments. This will make it easy to demonstrate your SSD income, as well as make your bank account clearly exempt from garnishment or attachment.

Although your SSD payments may be counted as income in a Chapter 13 repayment plan, as detailed above, once your repayment plan ends, your continued SSD benefits should not be subject to any action from creditors or the bankruptcy court.

However, if you've received a lump sum (such as back payments accrued while your disability claim was pending), these funds may be eligible for seizure by the bankruptcy trustee. In some states, if you don't affirmatively point out that these funds were paid by Social Security, they may not be automatically exempted from your bankruptcy filing, making them eligible for garnishment if you can't demonstrate that they were disability payments. And in other states, the bankruptcy trustee is able to garnish funds that are not meant for your "care and maintenance" -- so if the trustee determines that your lump sum payment exceeds the amount you need to support yourself, he or she can seize the excess portion.

For more information, contact your Social Security Disability attorney.