If you’re receiving Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI), you probably qualify for Chapter 7 bankruptcy. But how would declaring bankruptcy affect your monthly disability check?
SSI is a federal assistance program for the poorest Americans funded by general tax revenues. It’s designed to help blind and disabled individuals with little or no income, even if they’ve never worked. Social Security Disability Insurance, also known as SSDI, covers disabled individuals who cannot work any longer due to a disability. If you worked 5 in the last 10 years and paid into Social Security through FICA taxes, then you’re covered.
Those who file bankruptcy while receiving a monthly disability check may worry the SSA will reduce or terminate their benefits.
While this concern’s reasonable, we want to put your mind at ease. The short answer to the question, “How will a bankruptcy filing affect my disability check?” is simply this: It won’t.
Disability Check Exceptions: Child Support and Alimony Payments
Every disability check is exempted if and when you do file for bankruptcy.
The only exception? Garnishments for child support or alimony payments. Congress amended the bankruptcy law in 2005 to ensure that it didn’t discharge any domestic support obligations. In other words, if your disability check is garnished for child support or alimony payments, filing bankruptcy won’t change that. But filing bankruptcy individually or jointly with your spouse also won’t raise or lower your disability check amount, either.
How Chapter 7 Bankruptcy Works
What, exactly, is Chapter 7 bankruptcy? According to USCourts.gov, Chapter 7 bankruptcy provides for the sale of a debtor’s nonexempt property and distributing the proceeds to creditors. There’s a “means test” requirement you must pass before you file Chapter 7 based on income level and available assets. You’ll also need to complete a credit counseling course within six months prior, regardless of what chapter bankruptcy you file.
Unlike Chapter 13, Chapter 7 bankruptcy doesn’t require you to file a three to five-year repayment plan with your creditors. Instead, the Bankruptcy Code allows you, the debtor, to exempt certain property from repossession or liquidation, including:
- Your home
- Primary vehicle
- Clothes, books, and appliances
- Your life insurance policy and any interest earned (up to $12,625)
- Medical equipment and health aids
- Your 401k or Roth IRA retirement account
- Tools of the trade used for employment purposes (implements, equipment, musical instruments, etc.)
- Your wedding rings
However, anyone considering filing Chapter 7 should know that after filing your petition, you could lose non-exempt property to creditors. In other words, anything that’s not a crucial financial asset could get repossessed or sold to pay down outstanding debts. To see if you may qualify for Chapter 7 bankruptcy, start your online survey now.
What About Lump Sum Disability Payments?
Declaring bankruptcy means you’re asking both federal and state governments for protection from your creditors. Chapter 7 is one way to eliminate your credit card payments, unsecured loans or overwhelming medical debts. During this process, creditors can take your assets to sell to repay at least some your debts. Federal law ensures that creditors cannot seize the property we listed above to satisfy any outstanding payments.
As we said, your Social Security disability check is also exempt from seizure. That means creditors cannot take your disability check even if you received a lump sum payment. Sometimes, beneficiaries get a lump sum because they qualify for benefits for the 12 months prior to their application date. Since it can take two years or longer for benefit approval, these disability check lump-sum distributions are also exempt.
Other Bankruptcy Disability Check Exemptions
SSI and SSDI aren’t the only disability check exemptions protected during bankruptcy. You’ll also get to keep any:
- Social Security retirement income
- Unemployment benefits
- Monthly veterans’ disability check or pension payments
- Public assistance through state or federal programs, including TANF, WIC and SNAP
An Important Tip: Keep Separate Bank Accounts
Here’s one thing we recommend before filing bankruptcy: Deposit your lump-sum payment into a separate bank account. Don’t use the same one where the SSA automatically deposits your disability check every month! You want to avoid “commingling” those funds, or mixing them together in the same account. Only then should you start your Chapter 7 paperwork filing. After your bankruptcy case closes, the IRS can take some benefits to pay for any back taxes owed. In addition, the federal government can still seek repayment of federally backed loans (including your student loan/tuition payments, if applicable).
Talk to An Advocate Before You File Bankruptcy
Worried about your debt, but not sure if filing bankruptcy is right for you? You can try negotiating an out-of-court agreement with your creditors directly. You can also click the button below to schedule a free meeting with one of our disability advocates near you. A Social Security disability advocate can review your options in person based on your individual circumstances and help you decide. Best of all, these meetings are always free and don’t obligate you to do anything else.
Ready to see if you may qualify? Click the button below to start your free online benefits evaluation now:
Laura Schaefer is the author of The Teashop Girls, The Secret Ingredient, and Littler Women: A Modern Retelling. She is also an active co-author or ghostwriter of several nonfiction books on personal and business development. Laura currently lives in Windermere, Florida with her husband and daughter and works with clients all over the world. Visit her online at lauraschaeferwriter.com and linkedin.com.