Protecting Social Security Income in Bankruptcy

Today’s question is from Brooke, who lives in Boise, Idaho. Brooke is retired and receives Social Security income. She’s considering filing for Chapter 7 bankruptcy because, unfortunately, once her husband of more than three decades passed away, the loss of income meant Brook got into debt to cover her expenses. So in this blog post I will discuss Social Security, and Chapter 7 and Chapter 13 bankruptcy.

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Brooke is concerned that her Social Security income will be garnished or that filing for bankruptcy will affect her income.

Income Issues and Bankruptcy

When the bankruptcy law changed in 2005, known as the Bankruptcy Abuse Prevention Consumer Protection Act (BAPCPA), it included a change to how income is listed in the bankruptcy petition. Before the law change, income only applied to monthly income compared to expenses, that portion still remains in effect.

Income, whether for Chapter 7 bankruptcy or Chapter 13 bankruptcy, is listed in Schedule I of the petition (Official Bankruptcy form 106I Schedule I: Your Income (individuals).

If a debtor receives Social Security income, that is also listed in Schedule I. In Part 2 of Schedule I, “Give Details About Monthly Income,” section (8e), Social Security income is listed.

Social Security Income and the Means Test

The controversy surrounding BAPCPA is the Chapter 7 bankruptcy means test, which calculates income for six months before filing bankruptcy. If the debtor’s income is below the state median income, then for the most part, it’s possible that a debtor qualifies for Chapter 7 bankruptcy.

As part of the means test, certain income is excluded, and that would include income from the Social Security Act. Official Bankruptcy form B122A. Chapter 7 Statement of Your Current Monthly Income.

So this would help someone like Brooke qualify for bankruptcy because income is excluded. However, just because income is excluded from the means test, it still does not mean she automatically qualifies for Chapter 7 bankruptcy.

Comparing Schedule I to Schedule J in the Bankruptcy Petition

While Brook’s income is protected from the means test, the issue is if there is disposable income when comparing Schedule I to Schedule J. Schedule J is where expenses are listed in the bankruptcy petition (Official Bankruptcy form 106J, Schedule J: Your Expenses (individuals).

If there’s no disposable income, there’s no problem. But under certain situations, it’s possible someone with Social Security income would have to file for chapter 13 bankruptcy. The best example is a situation I faced with a former client.

My client earned approximately $800 in Social Security income, but she had no expenses because she lived with her daughter. My client’s only expense was spending her Social Security check at the Miccosukeee Casino and Resort in Miami, Florida.

In that scenario, she would have eight hundred plus dollars left over every month. There’s no doubt that the Chapter 7 bankruptcy trustee would object because her expense was not only excessive but not a required living expense.

However, the problem was easily resolved by delaying filing for bankruptcy and having my client contribute to the household expenses.

Does Bankruptcy Affect Social Security Income

Now, let’s take Brook’s question and reverse it. We now know how it’s possible that Social Security income will affect a bankruptcy case. But will bankruptcy affect her Social Security income? The answer is no.

Social Security income is a right that she has earned because of the number of years of employment. Bankruptcy is also a right. So there should be no effect on her Social Security income, whether she’s heavily in debt or has wiped out all her debt because of bankruptcy.

Thank you for reaching out to me, Brooke, and I hope this puts your mind at ease.

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