Social Security Benefits 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

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.