Special Rules in Bankruptcy, Part 1: Protecting Social Security Benefits

Generally those seeking a fresh start in bankruptcy end up having to surrender property that has net value greater than the dollar amounts they can claim as exempt, or else they have to pay that value to a trustee for the benefit of creditors. But there are some special rules that provide protection to certain types of property. This is the first of a series of blog articles about those special rules.

Increasingly we are seeing the elderly and retired in financial trouble. This is a disturbing trend that we expect will continue. Fortunately, certain rules can help out.

Social Security benefits, including Social Security disability benefits, are protected from any claims of creditors under federal law. Section 407 of U.S. Code title 42 provides, in pertinent part that ‘the right of any person to any future payment [for Social Security benefits] 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.” The effect of this is to provide “a complete bar to the forced inclusion of past and future social security proceeds in the bankruptcy estate” In re Carpenter 614 F.3d 930, 936-937 (8th Cir.,2010). This means that no exemption is needed to protect such benefits.

This important protection can be lost without proper advice. We always recommend that Social Security benefits be kept in a bank account separate from unprotected sources of income. And when a bankruptcy is filed, proper procedures have to be taken to list and disclose Social Security benefits and claim them as protected.

The elderly face special challenges in today’s environment. With proper planning and good advice, they can overcome those challenges. We have the knowledge and experience to provide this help.

Part 2: Protecting Retirement Funds and IRA’s

Part 3: Tax Refunds

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