Is Social Security Safe in Chapter 7 Bankruptcy?

Generally, Social Security benefits that have been or will be paid to the debtor are safe in a Chapter 7 bankruptcy. However, if you have Social Security benefits in a bank account prior to filing for bankruptcy, or have received a lump sum payment, you may run into trouble if you have commingled (mixed) these funds with non-Social Security money.

Read on to learn the details.

Ongoing Social Security Benefits

Federal law explicitly states that Social Security benefits are exempt, and it is the position of the Social Security Administration, as well as the bankruptcy courts, that such funds are protected. Therefore, absent other factors affecting your bankruptcy, ongoing Social Security benefits belong to you and will not be taken by the trustee.

Already-Received Social Security Benefits

Benefits received prior to the date you filed bankruptcy are also protected. However, if you commingle these benefits with non-Social Security funds, the trustee may argue that you cannot prove which funds are from Social Security and which are not, and therefore that you cannot exempt any of the funds. If you commingle your Social Security benefits with other money (even a single Social Security dollar with a single non-Social Security dollar), you risk losing the Social Security benefits exemption for the entire amount.

How to Protect Already-Received Social Security Benefits

While each case depends on the trustee assigned to oversee the matter, and how lenient he or she may be, it is generally recommended that you maintain your Social Security benefits in an account in which no other funds are deposited. If Social Security benefits are kept separate from all other funds, it is easier for a debtor to show the trustee that each dollar in question came directly from the Social Security Administration and is therefore protected. If you deposit any amount, even five dollars, into the account in which your Social Security benefits are kept, a trustee could argue that you can no longer prove which dollars came from Social Security and which did not, thus the entire balance is unprotected.

Using Exemptions to Protect Commingled Funds

If your Social Security benefits were commingled with other funds, you may be able to protect it by using a bankruptcy exemption, such a "cash on hand" or "wildcard" exemption.

Social Security Lump Sum Payments

If you receive a lump sum payment from Social Security prior to filing bankruptcy, such as a retroactive payment, the funds are protected by the same federal law that protects ongoing payments. However, they are also subject to the same standard when it comes to commingling funds. If you received a lump sum Social Security payment and deposited it into the same account in which other funds are deposited, such as your income or a spouse's income, a trustee could argue that the funds have been commingled and are no longer protected.

The bigger the potential payoff, the more likely it is that a trustee will try to argue that the lump sum belongs to the bankruptcy estate. If you received a substantial Social Security payment and it was commingled with other funds, a trustee, who represents the interests of your creditors, has more to gain by trying to prove that the funds have lost their protection.

Again, keeping your Social Security benefits separate from all other funds will help you in the event that you need to prove to the court that they all came from Social Security and are protected. As with ongoing payments, if funds were commingled and your trustee does succeed in proving that the funds are not protected by the federal Social Security exemption, you may be able to protect a portion of the funds with a cash-on-hand or wildcard exemption.