Social Security and Bankruptcy - Fremont Bankruptcy Attorney Blog

By Ryan C. Wood

The short answer is yes it is possible, but rare depending upon the circumstances. Your social security benefits are general exempted from garnishment and levy by normal creditors and possibly the state you live in. In California, the State of California does not levy on your social security benefits. Your creditors also cannot garnish your social security benefits or levy on your bank account that contains your social security benefits. A creditor can still sue you and obtain a judgment to enforce against you, but how will they enforce the judgment is the question.

The Internal Revenue Service Will and Can Absolutely Levy on Your Social Security Benefits

Please see 26 U.S.C. Section 6334(c) regarding property exempt from levy and the IRS’s ability to enforce unpaid taxes. Section 6334(c) provides reference to Section 207 of the Social Security Act. Section 207 provides: (a) The right of any person to any future payment under this title shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law. (b) No other provision of law, enacted before, on, or after the date of the enactment of this section, 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) Nothing in this section shall be construed to prohibit withholding taxes from any benefit under this title, 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.

Section 3402(p)(1) more or less treats social security payments as payment made by an employer as wages, which can be garnished and levied on in a bank account. The path to garnishment or ability to levy by the Internal Revenue Services is a twisted one, but nonetheless, the IRS can garnish social security benefits and levy upon social security benefits held in a bank account under certain circumstances.

If Your Only Income is Social Security Benefits You are Generally Considered Judgment Proof

If you owe a debt that is unsecured, that means there is no collateral securing the repayment of the debt, a creditor will have to sue you in state court and obtain a judgment to force repayment of the debt incurred. If your only income is social security benefits and you do not own real property, a house or raw land, then the options to enforce the judgment are very limited. Thus, the term judgment proof is described for this situation. A creditor can obtain a judgment against you, but how can the judgment be enforced? If you seek the counsel of a bankruptcy attorney regarding your debts be sure to let them know your only income is from social security. This should come out during a standard consultation but you never know. Make sure they know.

Some People That are Judgment Proof Still Choose to File Bankruptcy and Discharge Their Eligible Debts

If you are behind on your payments to unsecured creditors you know that the phone calls start relatively quickly after missing a payment and the letters demanding payment start relatively quickly too. Every now and then we have a client come in with income that is only social security. We inform them that they are for the most part judgment proof as described above. Some choose to file bankruptcy and discharge their eligible unsecured debts and others do not. For most they just want to move on with life and not worry about debts hanging out there to worry about. Everyone is different though. It is truly up to you what you believe is right for you. Filing for bankruptcy protection should stop the harassing phone calls and letters in the mail. As soon as the bankruptcy case is filed the automatic stay becomes effective stopping any and all collection activity. Once you receive a discharge in your case your creditors are barred from attempting to collect on a discharge debt incurred prior to the date the bankruptcy case was filed. Every now and then a creditor attempts to collect a debt after discharge and they can be held in contempt of court and sanctioned for this impermissible behavior.

By Ryan C. Wood

These days, most of Americans use credit cards in one form or another and carry a balance each month. Everyone has been affected by the economic meltdown. People living off social security benefits are no exception. If you are in over your head and in a lot of debt, and receive social security benefits, you may be wondering if receiving social security benefits will affect your ability to file a bankruptcy case. The answer depends on your specific financial situation.

If you currently do not own any real estate and the only income you receive is social security income, you are technically judgment proof because your social security benefits are exempt from collection activities, such as garnishments and levies. If this is your situation, you may not need to file for bankruptcy. Even if your creditors file a lawsuit against you and obtain a judgment, they cannot levy against your social security benefits. The most important thing is to make sure you can prove that everything in your bank account is derived from social security benefits and not commingled with other sources of income. It should not be too difficult to prove all the money you have is from social security benefits if that is your only source of income.

If you do have real estate or other assets that need to be protected and you have other sources of income in addition to your social security benefits, most people will need to complete the Statement of Current Monthly Income and Calculations (commonly referred to as the “Means Test”) to determine whether you qualify for a Chapter 7 bankruptcy or whether you should file a Chapter 13 bankruptcy instead. The means test determines what your average disposable income is based on your average income minus allowable deductions. If you have any disposable income left over it most likely means that you should be filing a Chapter 13 bankruptcy and paying back to them what you can afford to pay each month. Social security benefits are not considered income for means test purposes. That means that any income you receive from the Social Security office does not need to be calculated into this monthly equation.

However, even though social security benefits are not considered income for means test purposes, there is a second test to determine whether you qualify for Chapter 7 or Chapter 13 bankruptcy. This test depends on what your monthly household income and expenses are. This is similar to the means test in that it takes your income and subtracts your expenses, but while the means test calculates the average income minus allowable expenses based on IRS standards to determine your disposable income, this test simply takes what your actual and future monthly household income is and subtracts your actual expenses to create your monthly budget (Schedule I and J in your bankruptcy petition). Whether your social security benefits are considered “income” depends on what jurisdiction you live in. Here in the Northern District of California, social security benefits are included in your household income. If based on your monthly budget you have disposable income, then again, it is a sign that you may need to file for a Chapter 13 bankruptcy.

Bankruptcy laws can be confusing , especially when trying to differentiate income or expenses on the means test and income for your Schedules I and J. If you have any questions, it is a good idea to consult with an experienced bankruptcy attorney. Please contact us at Fremont bankruptcy lawyers or Union City bankruptcy lawyers, or call us at 877-9NEW-LIFE /877-963-9543 today to schedule a free consultation.