You Can’t Lose Your $17,165 Social Security Check in a Bankruptcy Case, Appeals Court Says

27 Jul You Can’t Lose Your $17,165 Social Security Check in a Bankruptcy Case, Appeals Court Says

According to the Eighth Circuit Bankruptcy Appellate Panel, a bankruptcy debtor cannot lose social security benefit payments in a bankruptcy case, even the money is paid as a $17,165 lump sum for past benefits. In re Carpenter, No. 08-6046 (8th Cir. BAP July 13, 2009), held that section 407 of the Social Security Act excludes such payments from the bankruptcy estate. Under the logic of this decision, social security payments of any kind are excluded from the bankruptcy estate in either chapter 7 or chapter 13 cases, and the debtor can keep this money without even needing to claim it as exempt.

The debtor in Carpenter had received $17,165 as a retroactive social security disability benefit. He placed the funds in a segregated bank account and later converted the money into a cashier’s check. Several months after receiving the money he filed chapter 7. The bankruptcy court ordered him to turn the social security money over to the trustee, but the appeals court reversed, holding that section 407 specifically overrode any bankruptcy statute suggesting that such funds belonged to the trustee.

Under this decision, it doesn’t matter what state the bankruptcy is filed in, because the funds don’t have to be claimed as exempt. The fact that the funds are from social security excludes them from the reach of any bankruptcy trustee.

It is important to note that section 707(b)(2) of the bankruptcy law (the “means test”), as well as section 1325(b)(2), exclude social security payments from consideration in a debtor’s budget in either chapter 7 or chapter 13. This means that social security benefits ought to be excluded from consideration in any consumer bankruptcy case, whether as an asset of the estate, or as income for the chapter 7 means test, or as income for funding a chapter 13 plan. It even should excluded from consideration for section 707(b)(3) motions, where the U.S. Trustee attempts to force debtors to convert to chapter 13, since the money can’t be used for creditors anyways under section 1325(b)(2).

In re Carpenter is an important reminder that courts should exclude social security payments from consideration in any consumer bankruptcy case.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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