Understanding Social Security Income in Bankruptcy Proceedings

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Can Bankruptcy Affect Your Social Security Payments?

Filing for bankruptcy does not impact your eligibility for Social Security benefits or the amount you receive. However, Social Security payments can influence bankruptcy proceedings.

If you are receiving Social Security benefits when you file for bankruptcy, the court may consider them when evaluating your ability to repay creditors. If you combine funds from Social Security in the same account with money from other sources, those funds may be at risk of forfeiture to pay your creditors.

How Is Social Security Income Considered in Bankruptcy?

Social Security income is exempt from forfeiture in bankruptcy, meaning the court cannot garnish these benefits to repay your debts. However, you must document Social Security benefits, along with other income sources and monthly expenses, by submitting the required means test.

Chapter 7

A means test determines eligibility for Chapter 7 bankruptcy, which discharges many forms of debt after forfeiting certain assets to repay creditors. If your income exceeds the median for a household of your size in your state, you may not qualify for Chapter 7 bankruptcy.

If you file for Chapter 7 bankruptcy, any Social Security benefits mixed with other funds in a savings or checking account may be subject to forfeiture. Depositing Social Security funds into a dedicated account can prevent this.

Chapter 13

In Chapter 13 bankruptcy, a repayment plan is established to provide full or partial repayment to creditors. The means test determines the repayment period (three or five years) and the monthly payment amount.

Can Bankruptcy Affect Other Retirement Accounts?

Funds in qualified retirement plans protected under the Employee Retirement Income Security Act of 1974 (ERISA) are generally shielded from forfeiture in bankruptcy. These include many 401(k) and 403(b) accounts, individual IRAs, and Roth IRAs. However, the court may access funds in nonqualified retirement plans.

If your total retirement funds exceed the exemption limit of $1,512,350 (adjusted for cost-of-living every three years), any surplus could be subject to forfeiture. The next update is due in 2025.

Retirement savings remain protected only while in shielded accounts. Once withdrawn, the court may consider them subject to forfeiture. Income streams from pension or retirement accounts must be documented in the bankruptcy means test and may be used in a Chapter 13 repayment plan.

The Bottom Line

Filing for bankruptcy does not directly affect your Social Security eligibility or benefit payments, but Social Security income can influence your qualification for Chapter 7 or Chapter 13 bankruptcy and repayment plans. If you are receiving Social Security benefits and considering bankruptcy, consult a bankruptcy attorney or financial adviser to protect your assets.

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