Can You File Bankruptcy on Disability?

Filing for bankruptcy can provide a path to financial relief for many individuals, including those receiving disability benefits. While the process involves specific legal requirements, disability income and related assets are often treated uniquely under bankruptcy law. Understanding these distinctions is important for anyone considering this financial step, as it can significantly influence eligibility and asset protection. The bankruptcy system offers a fresh start, accounting for the circumstances of disabled individuals.

Disability Income and Bankruptcy Eligibility

The type of disability income an individual receives can significantly impact their eligibility for different bankruptcy chapters, particularly Chapter 7, which involves a means test. Social Security Disability Income (SSDI) and Supplemental Security Income (SSI) are generally excluded from the calculation of “current monthly income” for the Chapter 7 means test. This exclusion often makes it easier for individuals receiving these federal benefits to qualify for Chapter 7 bankruptcy, which discharges most unsecured debts without requiring a repayment plan. While these benefits do not count towards the means test, they must still be reported on bankruptcy forms.

Similarly, Veterans Affairs (VA) disability benefits are also typically excluded from the means test calculation. This exclusion for VA benefits was solidified by the HAVEN Act, placing them in a protected category similar to Social Security benefits. However, private disability insurance payments, unlike federal disability benefits, are generally included as income for means test calculations. The inclusion of private disability income can affect a debtor’s ability to qualify for Chapter 7, potentially leading them towards a Chapter 13 repayment plan if their income exceeds the state median.

For Chapter 13 bankruptcy, which involves a repayment plan spanning three to five years, all income sources are considered to determine disposable income. While federal disability benefits like SSDI and SSI are often excluded from the means test for Chapter 7, their treatment in Chapter 13 repayment plans can vary by jurisdiction. It is important to accurately report all income sources and provide supporting documentation to the bankruptcy court. This transparency ensures the court has a complete financial picture, which is necessary for a successful bankruptcy filing.

Protecting Disability Assets and Benefits

Beyond income eligibility, a significant concern for disabled individuals filing for bankruptcy is the protection of their disability benefits and any assets purchased with those funds. Ongoing monthly disability benefits, whether from Social Security (SSDI/SSI) or VA, are generally protected from creditors under federal law. This protection ensures these funds are not seized during bankruptcy.

Lump-sum payments of disability benefits, such as back pay, can also be protected in bankruptcy. To maintain their exempt status, these funds must be clearly identifiable as disability benefits, a concept known as “tracing.” If disability funds are commingled with other, non-exempt funds in a bank account, it can become challenging to prove their source and protect them. Therefore, maintaining separate accounts for disability benefits can help preserve their exempt status.

When assets like a home or vehicle are purchased using disability benefits, their exempt status depends on both federal and state bankruptcy exemption laws. Debtors can typically choose between a set of federal exemptions or the exemptions provided by their state, if their state allows this choice. Some states offer specific protections for certain types of disability income or assets derived from them, while federal exemptions also include provisions for disability benefits. Understanding which set of exemptions offers the most comprehensive protection for particular assets is an important step in the bankruptcy process.

Navigating the Bankruptcy Process as a Disabled Individual

Disabled individuals navigating the bankruptcy process may encounter specific procedural considerations and available accommodations. Beyond standard bankruptcy forms, additional documentation related to disability status, such as official award letters, may be necessary to substantiate income exclusions or asset exemptions. Such documentation helps the court and the bankruptcy trustee understand the nature and source of the debtor’s funds.

The bankruptcy code requires debtors to complete a credit counseling course before filing and a debtor education course after filing to receive a discharge. However, exemptions from these requirements are possible for individuals with physical disabilities or mental incapacities that prevent them from understanding or participating in the courses. To obtain such a waiver, debtors typically need to file a motion with the court and provide documentation supporting their incapacity or disability.

The Section 341 Meeting of Creditors, a mandatory hearing, can also be adjusted for disabled individuals. Accommodations such as remote appearance by telephone or video, the provision of sign language interpreters, or assistive listening devices can be requested in advance. These accommodations aim to ensure equal access and participation in the legal proceedings. During this meeting, the trustee will review the debtor’s financial information and may inquire about commingled funds or the source of specific assets.

Medical debt, a common financial burden for many disabled individuals, is generally considered unsecured debt and is typically dischargeable in both Chapter 7 and Chapter 13 bankruptcy. While bankruptcy can provide relief from medical bills, it is important to understand that filing for bankruptcy involves addressing all debts, not just medical ones. The decision to file for bankruptcy is a significant one, and understanding how disability income and assets are treated, along with the procedural accommodations available, can help disabled individuals make informed choices about their financial future.