Social Security Income: Invisible Money Bankruptcy Cannot Touch.

19 Dec Social Security Income: Invisible Money Bankruptcy Cannot Touch.

Do not count Social Security Income or Supplemental Security Income when calculating disposable income for debt repayment.

Bankruptcy requires an evaluation of one’s ability to pay existing debt. This article discusses why Social Security Income and Supplemental Security Income is not used for repayment of debt in Chapter 7 and Chapter 13 forms of bankruptcy.

There are two main tests, the Means Test and the Best Efforts Test, used to determine how much money, if any, must be paid to creditors in a bankruptcy case. Government bureaucracy loves standardized forms and plenty of them. Bankruptcy is no exception.

The Means Test. Chapter 7 bankruptcy cases use the Official Form 122A series of documents to measure income against the median income of a same size household in your state. Chapter 13 bankruptcy cases use the Official Form 122C documents to determine the amount of disposable income available to pay toward debt. Both series of forms deduct a measured amount of living expenses, sometimes the full amount of actual expenses, sometimes a predetermined amount based upon the cost of living in the county of residence. If all that seems complicated, it is, because Congress counts what it thinks you should spend instead of what you actually spend.

The Best Efforts Test. A less complicated measure of disposable income starts with projected net monthly income and deducts reasonable projected monthly expenses.

The amount left after deduction of expenses in each test is the amount of disposable income theoretically available to be paid to creditors each month, and determines whether you can receive a discharge of debt in a chapter 7 or whether you have to make payments over a period time from three to five years.

Social Security Income and Supplemental Security Income is exempt from consideration when determining the Means Test and the Best Efforts Test. For purpose of disclosure, list it as income but exclude it from any calculation. Here is the long version why…

42 U.S. Code Subchapter II – Federal Old-Age, Survivors, and Disability Insurance Benefits
The Social Security Act says qualified persons, and their survivors, who have earned sufficient work credits, are entitled to receive monthly payments from the Social Security Act if they meet certain age requirements or if they are disabled. The Social Security Trust Fund collects money that is payroll deducted from employee wages and matched by employer taxes and uses that money to pay these old-age benefits and disability benefits. These benefits are called Social Security Income (SS) or Social Security Disability Income (SSD).

What makes this money invisible to bankruptcy? Subchapter 7 contains an anti-assignment provision, also known as a non-bankruptcy exemption.

42 U.S. Code 407 – Assignment of benefits
(a)IN GENERAL
The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.
(b)AMENDMENT OF SECTION
No other provision of law, enacted before, on, or after April 20, 1983, may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference to this section.
(c)WITHHOLDING OF TAXES
Nothing in this section shall be construed to prohibit withholding taxes from any benefit under this subchapter, if such withholding is done pursuant to a request made in accordance with section 3402(p)(1) of the Internal Revenue Code of 1986 by the person entitled to such benefit or such person’s representative payee.

In review, first, under (a) it is exempt.

Just to be clear, under (b) exempt means exempt and no other law shall change that exemption unless that law expressly refers back to this exemption section. If Congress wants to change this exemption it has to pass another law specifically saying so.

And in case you wondered, under (c) yes, the IRS can authorize an intercept of social security benefits in certain cases and here is the reason why, but that is not relevant to this discussion about bankruptcy.

42 U.S. Code Subchapter XVI – Supplemental Security Income For Aged, Blind, And Disabled
Another section of the Act, 42 U.S.C. 1383 provides a certain level of benefits for low income disable persons without the work credit requirement. These benefits are called Supplemental Security Income (SSI).  They are not paid out of the Social Security Trust Fund but are paid out of the general revenue of the United States Treasury.

Is this money invisible to bankruptcy also? Yes, subchapter 16 contains the same anti-assignment protection by reference to section 407 above.

42 U.S.Code 1383 – Procedure for payment of benefits
42 U.S.Code 1383(d)(1):
The provisions of section 407 of this title and subsections (a), (d), and (e) of section 405 of this title shall apply with respect to this part to the same extent as they apply in the case of subchapter II of this chapter.

Pretty amazing stuff isn’t it? But don’t just take my word for it. Several courts have already ruled in support of this exemption. If you want to delve into the nitty gritty details, look at the Central District of Illinois case, In re David J. Franklin, 13-81207 decided March 12, 2014, and In re Mihal, 2015 Bankr 1683 for an in depth discussion of these other court decisions.

Another interesting fact about Social Security and Bankruptcy law:
In re Neavear, 674 F.2d 1201 (7th Cir. 1982) held that an overpayment of benefits owed to the Social Security Administration was dischargeable in bankruptcy, however, the SSA could object to that discharge if the overpayment was received through fraud.

I hope this helps you qualify for bankruptcy.

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Andy Miofsky, Esq.

Andy Miofsky holds the highest AV PREEMINENT rating from Martindale Hubbell Law Directory and a perfect 10.0 from AVVO. Andy is an Illinois consumer rights lawyer with offices in Granite City Illinois. Andy represents people with bankruptcy and student loan debt problems throughout the Southern District of Illinois since 1979.
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