Can Someone on Disability File for Bankruptcy?

Individuals receiving disability benefits often face unique financial challenges. Understanding how bankruptcy can provide relief is an important step. This article explores general considerations for individuals on disability who are contemplating bankruptcy, outlining the available options, the impact of disability income on a bankruptcy case, and the necessary steps involved in the filing and post-filing procedures.

Understanding Bankruptcy Options

Individuals receiving disability benefits are generally eligible to file for bankruptcy, providing a pathway to address overwhelming debt. The two primary types of consumer bankruptcy are Chapter 7 and Chapter 13. Chapter 7, known as liquidation bankruptcy, typically discharges most unsecured debts, such as credit card balances and medical bills, without a repayment plan.

Chapter 13 involves a reorganization of debts through a court-approved repayment plan, usually spanning three to five years. This option allows debtors to retain their assets while making regular payments to creditors. Disability income is broadly considered income for bankruptcy purposes, influencing eligibility and repayment obligations.

How Disability Income Affects Your Bankruptcy Case

The way disability income is treated can significantly influence eligibility for different bankruptcy chapters and the structure of repayment plans. For Chapter 7 eligibility, the “means test” assesses an individual’s current monthly income against the median income for a household of similar size in their state. Social Security Disability Income (SSDI), Supplemental Security Income (SSI), and Veterans Administration (VA) disability benefits are generally excluded from the means test calculation, which can make it easier for individuals receiving these benefits to qualify for Chapter 7 bankruptcy. Other forms of disability income, such as those from private disability insurance policies or state-funded programs, are typically included. If an individual’s income, including these non-excluded disability benefits, exceeds the state median, they may still qualify for Chapter 7 if their disposable income falls below a certain threshold after accounting for allowed expenses.

For Chapter 13 repayment plans, disposable income is a key factor in determining the monthly payment amount to creditors. While SSDI, SSI, and VA benefits are excluded from the Chapter 7 means test, they are usually included when calculating disposable income for a Chapter 13 plan. This means that a portion of these benefits may contribute to the funds available for debt repayment over the plan’s duration.

Disability benefits are frequently protected from creditors through specific exemptions in bankruptcy law. Federal law, for instance, provides exemptions for Social Security benefits, VA benefits, and general disability or illness benefits. Many states also have their own exemption laws that protect disability income.

It is advisable to keep disability benefits in a separate bank account to prevent commingling, as mixing them could make it challenging to prove their exempt status. While ongoing disability payments are typically protected, any unspent lump-sum payments, such as back pay, may require specific action to ensure their exemption. Debtors might need to demonstrate the source of these funds to the bankruptcy trustee to confirm they originated from protected disability benefits.

Preparing for Bankruptcy Filing

Before filing for bankruptcy, individuals on disability must gather specific financial information and documents. This includes collecting disability benefit statements, recent bank account statements, and tax returns, typically for the past two years for Chapter 7 cases and four years for Chapter 13. A comprehensive list of all creditors, detailing names, addresses, and amounts owed, is also necessary, along with valuations of any assets owned.

A mandatory pre-filing credit counseling course must be completed within 180 days before the bankruptcy petition is filed. These sessions, provided by U.S. Trustee-approved agencies, aim to explore alternatives to bankruptcy and help individuals understand their financial situation. While participation is required, individuals are not obligated to follow any proposed repayment plan.

Seeking guidance from a qualified bankruptcy attorney is highly recommended, especially for individuals with unique income streams like disability benefits. An attorney can provide tailored advice, help navigate complex income and exemption rules, and ensure all necessary documentation is correctly prepared and submitted.

Navigating the Bankruptcy Filing and Post-Filing Process

Once preparatory steps are complete, the formal bankruptcy process begins with filing the petition and supporting schedules with the court. This marks the official commencement of the bankruptcy case. Immediately upon filing, an automatic stay goes into effect. This stay temporarily halts most collection actions by creditors, providing immediate relief from wage garnishments, lawsuits, foreclosures, and repossessions.

A mandatory meeting of creditors, also known as the 341 meeting, is scheduled approximately 20 to 40 days after filing. This meeting is conducted by a bankruptcy trustee, not a judge, and typically lasts only a few minutes. During the 341 meeting, the debtor is placed under oath and answers questions from the trustee regarding their bankruptcy paperwork, financial situation, assets, and debts. Creditors are invited to attend, but they rarely do.

After the 341 meeting, debtors are required to complete a post-filing financial management course, also known as debtor education. This course, typically taken online, must be finished before debts can be discharged. The goal of bankruptcy is the discharge of eligible debts, which is a court order releasing the debtor from personal liability.

For Chapter 7 cases, discharge usually occurs within three to six months after filing. In Chapter 13, it happens after the successful completion of the repayment plan. Disability benefits remain protected throughout this process. Following discharge, individuals can begin rebuilding their credit, focusing on responsible financial practices.