By Ryan C. Wood

Social Security income is excluded from the means test calculation under the Social Security Act and 11 U.S.C. §101(10A)(B). This means your bankruptcy lawyer should not count your Social Security Act income as part of your gross income in determining what chapter of the bankruptcy code to file under. Generally there are two tests to determine whether a person living on Social Security income can qualify to file a Chapter 7 or will they have to file a Chapter 13 bankruptcy case instead. The two tests are 1) calculating your disposable income in the “means test” and 2) looking at your income and expenses to see if there is any disposable income to pay into a Chapter 13 bankruptcy plan. In Chapter 13 bankruptcy cases the means test is more formally called Form 22C (Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income). In the means test uses your six month average gross income and compares it to the median income for the number of people in your household living in your area. If your household income is above the median for the number of people in your household you will need to deduct the allowable expenses (mostly based on IRS standards) to see what your disposable income is. This disposable income is what you need to commit to your unsecured creditors in a Chapter 13 bankruptcy plan. The other test is looking at your income (Schedule I) and expenses (Schedule J). Normally your Social Security income is included in Schedule I because it is income you receive. If your income exceeds your expenses you may have to pay the disposable income into your Chapter 13 bankruptcy plan even if some of the income is from Social Security. There is now new case law that challenges this.

In Anderson, Trustee, v. Cranmer (In re Cranmer), 2012 WL 5235365 (10th Cir. 10/24/12), the court ruled that Social Security income did not need to be included in a Chapter 13 plan payment. In this case the debtor, Cranmer, received Social Security income. He included the income in his Schedule I but deducted a portion of the income on Schedule J as exempt Social Security funds. The trustee objected to this and also indicated that failure to include all of his projected disposable income means he did not propose his Chapter 13 plan in good faith. The court shot down the trustee’s objections. The court indicated that although “projected disposable income” was not defined in the Bankruptcy Code, “disposable income” was defined in 11 U.S.C. §1325(b)(2). Disposable income excludes Social Security income. The court reasoned that putting the word “projected” in front of “disposable income” did not change its meaning and that Cranmer was correct in excluding a portion of his income as exempt Social Security funds. The court also indicated that proposing a Chapter 13 plan payment that followed the Bankruptcy Code was not considered bad faith.

There are similar cases being appealed in the 4th and 5th Circuits currently. You should remember that the rules may be different depending on where you live, so if you have any questions you should consult an experienced bankruptcy attorney in your area.