By Ryan C. Wood
There are many reasons why people may need to file for bankruptcy. One of the reasons people may need to file for bankruptcy is their inability to work due to a disability, either from the workplace or their own personal health issues. Workplace injuries are unexpected and may wreck havoc on many aspects of your life including your finances. Disabilities due to your personal health issues are also a huge contributor to people’s financial woes. It is not surprising that people suffering from a disability may need to file for bankruptcy. Will receiving disability payments, either from a private insurance company or from public benefits such as state disability or Social Security Disability affect your bankruptcy case?
Receiving Disability Payments
If you are receiving disability payments or received a lump sum disability payment the payments need to be protected in your bankruptcy estate. Make sure you communicate to your bankruptcy lawyer you are receiving disability. Luckily your disability payments received are protected in California, whether they are from a private or public entity. California exemptions protect disability payments in full so you do not have to worry about losing those payments if they are sitting in a bank account. It may be in your best interest to use separate bank accounts for disability payments so you do not have any commingling issues. Commingling your disability payments with other sources of income may result in you having a difficult time proving what funds came from what source. Tracing the source of the disability payments should be easy and simple.
Disability and If You Own Real Estate
If you are disabled you have the right to the highest exemption value if you have equity in your home. Yes, receiving disability will affect your bankruptcy. Real estate values are increase in most parts of California. After the last several years of depressed home values people in certain parts of California are seeing increases in their home values again. That is great news if you are in the process of selling your home, but what if you have no intention of selling your home and you need to file for bankruptcy? As a bankruptcy attorney I have seen many people that are stuck in a situation where they need to file for bankruptcy but have a lot of equity in their home.
When you file for bankruptcy all of your assets are included in the bankruptcy estate. Each state has exemptions to protect your assets. Exemptions allow people filing for bankruptcy to keep a lot of their assets and obtain the fresh start they are looking for. If you have more assets than what can be protected that is where you run into problems. If you file a Chapter 7 bankruptcy case, any unexempt assets are liquidated and the proceeds are given to your creditors in exchange for a discharge of your debts. In a Chapter 13 bankruptcy case, you need to pay the amount of the unexempt asset into a Chapter 13 plan. You are essentially buying back your unexempt assets.
What can these people do then if they have equity in their home? If they file for Chapter 7 bankruptcy protection the trustee may liquidate their homes to satisfy creditors. If they file for Chapter 13 bankruptcy protection they need to pay the amount that is not exempted in their Chapter 13 bankruptcy plan but they may not have the funds to do so because they are on limited disability income.
If you live in California, you own real estate that has a lot of equity and are receiving disability you can use the $175,000 homestead exemption if you are physically or mentally disabled and as a result of that disability you cannot engage in substantial gainful employment. See California Code of Civil Procedure Section 704.730(a)(3)(B). If a creditor objects to the use of the homestead exemption that party has the burden of proving the exemption was not accurately used. If the creditor can provide evidence that contradicts the use of the exemption, the burden will then be on you to provide proof that indicates the use of the exemption was proper. There is a rebuttable presumption that a person receiving disability insurance payments under Title II or supplemental security income payments under Title XVI of the Social Security Act satisfies the requirements to receive the homestead exemption. The determination of whether you qualify for the exemption (have a mental or physical disability and cannot engage in substantial gainful employment) may be different in each case.
What constitutes “substantial gainful employment”? In one California case, In re Rostler, 169 B.R. 408 (Bankr. C.D. Cal. 1994), the court held that to satisfy this element, the person filing for bankruptcy must have been 1) unable to perform meaningful mental or physical work-related activity 2) in a competitive or self-employed position that 3) normally results in pay or profit. The fact that you can get “any work” or part-time work may not rise to the level of substantial gainful employment.
There are a number of types of income that must be documented when filing for bankruptcy protection. Disability insurance or payments are no difference. So, will receiving disability payments effect my bankruptcy case is easily answered, the answer is yes, and in most instances in a positive way.