Federal law makes Social Security benefits exempt from creditors’ claims (see Social Security, Foreclosures, And bankruptcy – Sometimes They Do Mix). Even a creditor with a legal judgment against you (with the exception of the IRS) cannot intercept your Social Security payments or take that money from you after it’s been paid to you. Not only is this good news, it’s important news, since, according to The National Consumer Bankruptcy Project, bankruptcy is becoming much more common among the elderly.
The reasons for this are several. On a fixed income, older Americans have a hard time keeping up with debt payments and with rising costs of fuel and food. Parents who tried to help children who had been laid off found themselves in financial trouble, and of course medical costs not covered by insurance play a big role in bankruptcy among seniors. It’s reassuring, then, that social security benefits, pensions, and 401(k) plans are exempt from collection.
One sad thing that I’ve noticed is that, by the time clients have come to one of my four Indiana bankruptcy law offices to seek legal help, bill collectors have used coercive techniques to collect unpaid bills, sometimes including getting hold of social security money out of bank accounts. That happens because most seniors have their Social Security deposited directly into their bank accounts. Since the Social Security money is mixed in with other money, sometimes the bank will unknowingly allow creditors to take money out of the account if they have a judgment.
What effect does filing bankruptcy have on your right to receive Social Security benefits (I’m referring to either retirement or disability benefits from Social Security)? This question relates to the exemption portion of bankruptcy law, (which is the part of Indiana bankruptcy law I helped establish). The good news is, Social Security benefits are exempt from creditors’ claims, including bankruptcy trustees. On the other hand, ongoing benefits are counted in your bankruptcy “budget” when your disposable income is considered by the court. In fact, a very large and important portion of the work I perform as a bankruptcy lawyer is (see The Creditors’ Meeting – Be There Or Be Square) is preparing all the documents and information about your income, your assets, and your debts for the court to consider.
And, in almost every case, the court will consider Social Security to be just that – your security from creditors.