Can You File Bankruptcy While on Social Security?

Bankruptcy offers a legal pathway for individuals overwhelmed by debt to achieve financial relief. This federal process helps debtors liquidate assets or reorganize financial obligations into manageable repayment plans. Its aim is to provide a “fresh start” by discharging qualifying debts, allowing individuals to rebuild their finances.

Understanding General Bankruptcy Eligibility

To file for bankruptcy in the United States, individuals must meet several criteria. A primary requirement is establishing residency; a debtor must reside in the district where they file for the greater part of the 180 days preceding the filing. All individual debtors must also complete a credit counseling course from an approved agency within 180 days before filing their petition.

There are two main types of individual bankruptcy: Chapter 7 and Chapter 13. Chapter 7, known as liquidation bankruptcy, involves selling certain non-exempt assets to repay creditors, with remaining qualifying debts discharged. Chapter 13, a reorganization bankruptcy, allows debtors with a regular income to propose a repayment plan, lasting three to five years, to repay all or a portion of their debts. The choice depends on a debtor’s income, assets, and the nature of their debts.

How Social Security Income is Considered

Social Security income receives specific treatment in bankruptcy for Chapter 7 eligibility and Chapter 13 repayment plans. Under federal law, Social Security benefits are excluded from the calculation of “current monthly income” for the Chapter 7 means test. This means Social Security benefits do not automatically disqualify an individual from Chapter 7, even if their total income might otherwise exceed the state’s median.

However, while Social Security benefits are excluded from the means test for Chapter 7, they are considered when determining “disposable income” for a Chapter 13 repayment plan. A Chapter 13 plan requires debtors to commit their “projected disposable income” to repay creditors over three to five years. Although the Social Security Act itself states that benefits are not subject to the operation of any bankruptcy or insolvency law, some courts consider these funds when assessing the feasibility and good faith of a Chapter 13 plan, even if they are not included in the formal disposable income calculation. Social Security income does not prevent bankruptcy, but it significantly influences which chapter is suitable and how a repayment plan is structured.

Protecting Social Security Benefits and Related Assets

Social Security benefits are protected from creditors in bankruptcy due to federal law. Section 407 of the Social Security Act explicitly states that Social Security payments are not subject to “execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.” This protection extends to both Social Security Disability (SSD) and Supplemental Security Income (SSI) payments.

Creditors cannot seize these funds, whether they are received directly or deposited into a bank account. The U.S. Treasury Department implemented a rule effective May 1, 2011, which further safeguards electronically deposited federal benefits, including Social Security. This rule requires financial institutions to protect an amount equal to the sum of federal benefits direct deposited into an account during a two-month period from garnishment orders, ensuring the account holder retains access to these funds. To maintain this protected status, it is advisable to avoid commingling Social Security funds with other non-exempt funds in the same account, though some courts have held funds remain exempt if traceable. Federal law now mandates that all federal benefit payments, including Social Security, be made electronically, either through direct deposit into a bank account or onto a Direct Express® Debit Mastercard®.

Dischargeable and Non-Dischargeable Debts

Bankruptcy aims to provide a fresh financial start by discharging various debts, but certain obligations are not eliminated. Common debts that are dischargeable in bankruptcy include credit card debt, medical bills, personal loans, and past-due utility bills. These are unsecured debts, meaning they are not tied to specific collateral.

Conversely, federal law, 11 U.S.C. § 523, outlines categories of debts that are non-dischargeable. These include most student loans, unless proving “undue hardship,” which is a difficult legal standard to meet. Domestic support obligations, such as child support and alimony, are also non-dischargeable. Recent tax debts, particularly those for which a fraudulent return was filed or an attempt to evade taxes was made, and certain government fines or penalties, also survive bankruptcy. Debts for personal injury or death caused by driving under the influence, as well as debts obtained by fraud or false pretenses, are not discharged.