Can You File Bankruptcy While on Disability?

For individuals grappling with debt while navigating the complexities of disability, the prospect of bankruptcy often raises questions regarding its feasibility and impact. It is generally possible for those receiving disability benefits to file for bankruptcy, a legal process designed to provide financial relief. This avenue can offer a structured path to manage or eliminate overwhelming debt, providing a fresh financial start. Understanding the specific rules and protections in place is important for disabled individuals considering this option. This article will explore the pertinent aspects of bankruptcy for those on disability, from eligibility to asset protection and the filing process.

Determining Bankruptcy Eligibility

Individuals receiving disability benefits must meet specific financial criteria to qualify for bankruptcy, particularly for Chapter 7. Chapter 7 eligibility is often determined by the “means test,” which compares a filer’s income to the median income for a household of similar size in their state.

A significant consideration for disabled individuals is how their disability income is treated under the means test. Social Security Disability Income (SSDI) and Supplemental Security Income (SSI) are generally excluded from the calculation of current monthly income for Chapter 7 means test purposes. This federal protection excludes these benefits from the income threshold. VA disability benefits are also excluded from this calculation, a provision supported by the Honoring American Veterans in Extreme Need (HAVEN) Act.

While certain disability benefits are excluded from the means test calculation for Chapter 7 eligibility, other forms of disability income, such as those from state disability programs or private insurance, are generally included. The means test also considers total household income, meaning income from other household members might impact eligibility, even if the disabled individual’s specific benefits are excluded. If an individual’s income, after applicable exclusions, exceeds the state median, they may still qualify for Chapter 7 if their disposable income falls below a certain threshold after deducting allowed expenses.

For Chapter 13 bankruptcy, the income requirements differ as it involves a repayment plan. Individuals must demonstrate a regular income source to fund their proposed repayment plan, and this income can include disability payments. While SSDI, SSI, and VA disability benefits are excluded from the Chapter 7 means test, they are considered when assessing an individual’s ability to make payments in a Chapter 13 plan.

Protecting Your Disability Benefits and Assets

A primary concern for individuals on disability considering bankruptcy is the protection of their benefits and other assets. Bankruptcy exemptions play an important role in determining what property a debtor can retain. These exemptions, which can be federal or state-specific, prevent certain assets from being liquidated by the bankruptcy trustee to pay creditors.

Many disability benefits are fully or partially exempt from creditors under federal or state law. Federal law specifically exempts various public benefits, including Social Security, unemployment compensation, veteran’s benefits, public assistance, and disability or illness benefits.

While the benefits themselves are often protected, how they are managed can affect their exempt status. If disability funds are commingled with non-exempt funds in a bank account, it can become challenging to trace and protect the exempt portion. Maintaining separate accounts for disability benefits can help ensure their continued protection during bankruptcy proceedings.

Beyond disability benefits, other assets are also subject to exemptions. Federal exemptions, for cases filed on or after April 1, 2025, include a homestead exemption of up to $31,575 in equity for a primary residence. A motor vehicle exemption of up to $5,025, and a household goods exemption up to $16,850 total, limited to $800 per item are also available. A “wildcard” exemption, which can be applied to any property, is available for $1,675, plus up to $15,800 of any unused homestead exemption. Debtors can choose between federal and state exemptions, depending on which system offers greater protection for their specific assets.

Selecting the Appropriate Bankruptcy Chapter

For individuals receiving disability benefits, choosing between Chapter 7 and Chapter 13 bankruptcy requires careful consideration of their financial situation and goals. Each chapter offers a distinct approach to debt relief, with different implications for income, assets, and future financial stability. The decision depends on factors such as income levels, types of debt, and the desire to retain certain assets.

Chapter 7 bankruptcy is often suitable for disabled individuals with limited income and few non-exempt assets. This chapter provides a discharge of most unsecured debts, such as credit card balances and medical bills, typically within four to six months. The means test determines eligibility for Chapter 7, and certain disability incomes like SSDI, SSI, and VA benefits are excluded from the means test. If a filer’s assets are fully covered by exemptions, they generally do not lose property in a Chapter 7 case.

Alternatively, Chapter 13 bankruptcy is a reorganization bankruptcy designed for individuals with a regular income who can afford to repay some of their debts over time. This chapter is beneficial for those who have non-exempt assets they wish to protect, or debts not dischargeable in Chapter 7, such as certain tax obligations or mortgage arrears. A Chapter 13 repayment plan typically spans three to five years, during which the debtor makes regular payments to a trustee, who then distributes funds to creditors.

For disabled individuals, Chapter 13 can be a viable option if they have a steady income, including disability benefits, that allows them to make plan payments. While disability income is included in the disposable income calculation for a Chapter 13 plan, it provides a structured way to manage debt without liquidating assets. This chapter also offers the ability to catch up on secured debts, like mortgage or car payments, preventing foreclosure or repossession. The choice between Chapter 7 and Chapter 13 ultimately hinges on an individual’s unique financial circumstances and their objectives for debt resolution.

Navigating the Bankruptcy Filing Process

Once an individual on disability determines their eligibility and selects the appropriate bankruptcy chapter, they must navigate a series of procedural steps to complete the filing process. These steps are mandated by federal law and are consistent across the United States. Adherence to these requirements is important for a successful bankruptcy discharge.

Before filing the bankruptcy petition, all individual debtors are required to complete a pre-bankruptcy credit counseling course from an approved agency. This course provides an evaluation of the debtor’s financial situation and explores alternatives to bankruptcy. The certificate of completion must be filed with the bankruptcy paperwork or within 15 days of filing.

Following the credit counseling, the debtor prepares and files the bankruptcy petition along with several schedules detailing their assets, liabilities, income, and expenses. After the petition is filed, an automatic stay goes into effect, which temporarily prevents most creditors from continuing collection actions. A bankruptcy trustee is then appointed to oversee the case, reviewing the submitted documentation.

A mandatory “meeting of creditors,” also known as a 341 meeting, is scheduled approximately 20 to 40 days after the petition is filed. This meeting is not a court hearing with a judge, but an informal session where the trustee asks the debtor questions under oath about their financial affairs. Creditors may attend. Most 341 meetings are brief, often lasting less than 10 minutes, and many are held virtually.

After the 341 meeting, and before receiving a discharge of debts, debtors must complete a second course: a personal financial management course, also known as debtor education. This course focuses on financial literacy and money management skills. The certificate of completion must be filed with the court within 60 days of the first date set for the meeting of creditors for Chapter 7 cases, or before the last payment in a Chapter 13 plan. The final step is the discharge of debts, which is a court order releasing the debtor from personal liability for most of their debts. This order prohibits creditors from attempting to collect discharged debts.