Unique Issues with Disability and Bankruptcy

The Social Security Administration reports that there are approximately nine million individuals who receive social security disability benefits. Due to the amount of these benefits, however, it can prove challenging to pay for monthly living costs. As a result, many people supplement their disability income with credit cards, which can eventually lead to significant debt. When debt accrues, creditors are not far behind. To stop creditor harassment, it is often necessary to file for bankruptcy. Disabled individuals have a number of unique considerations when filing for  bankruptcy, which we will address below.

Deciding on the Best Type of Bankruptcy

When it comes to deciding between filing for Chapter 7 or Chapter 13 bankruptcy, it is critical to understand that all disability payments must be reported when bankruptcy is involved. In accordance with Chapter 7 bankruptcy, all of a person’s property is considered when bankruptcy is declared. With Chapter 13 bankruptcy, a person is allowed to keep all of his or her property assuming that the person can pay back all or some of that debts in accordance with a payment plan.

Chapter 7 Bankruptcy and Disability Benefits

During Chapter 7 bankruptcy, most of a person’s property is classified as property of the bankrupt estate, which means that a bankruptcy trustee can take nonexempt assets and sell these to repay creditors. Fortunately in a large number of cases, federal and state bankruptcy exemptions are capable of being used to protect a person’s estate. The degree to which a person’s benefits are protected, however, depends on the source of payments, which often fall into one of the following categories:

• Monthly payments. Both the Social Security Administration as well as bankruptcy law protects individuals who receive Social Security Disability Insurance (SSDI). In many cases, if an individual receives monthly SSDI payments, the, he or she will be allowed to keep this income. In many cases, people navigating the bankruptcy process rely on these amounts to support themselves as well as their dependents, which is why there are federal and state laws designed to insulate these payments from creditors.  
• Lump sum payments. If a person receives a lump sum for disability benefits, however, he or she will be required to trace this amount and establish that it was an SSDI payment. In many cases, SSDI payments are protected from bankruptcy by the Social Security Act. Sometimes, any amount of a lump sum disability payment that is greater than the amount needed for daily living expenses will be used to pay off creditors. Tasked with interpreting how to classify bankruptcy lump sum payments, an 8th Circuit Bankruptcy Court held that all disability benefits are excluded from bankruptcy, but some courts have reached different conclusions.
• Healthcare costs. In the state of California, there is no bankruptcy exemption if a judgment creditor is a provider of health care whose claim is the basis on which the benefits are paid.

Some Debts can Still be Collected

Despite these exemptions, the federal government is able to garnish SSI benefits to cover certain types of debt. For example, the federal government can pay itself from SSDI benefits to pay off income taxes that you owe. Additionally, if an individual owes student loans, the federal government can garnish SSDI. It is also possible for SSDI benefits to be garnished in California if an individual owes child support payments.

Disability Benefits and Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, a person is able to keep most of his or her property after the creation of a payment plan to repay any outstanding debt. In contrast to Chapter 7 bankruptcy, a trustee will not sell assets that qualify as exempt from bankruptcy back to any creditor. The amount of non-exempt assets that an individual has, however, will increase the amount that a person will be required to pay creditors back through the terms of a repayment plan. If a court decides that a portion of an individual’s disability benefits are not exempt from bankruptcy, these amounts must then be counted toward a person’s unsecured debts. Additionally, disability payments must be disclosed in a person’s bankruptcy budget and can end up influencing how much a person’s monthly repayment plan should be.

Speak with an Experienced Bankruptcy Attorney

While some disability benefits are absolutely exempt from the bankruptcy process, the protection afforded other types of disability payments is much less certain. If you or a loved one has questions or concerns about the bankruptcy process, you should not hesitate to speak with an experienced bankruptcy attorney. Contact attorney Melanie Tavare today to schedule a free consultation.