Filing for bankruptcy can be a complex process, especially for those who rely on disability benefits as a primary source of income. Fortunately, disability payments, such as Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI), are generally protected under federal law and are often considered exempt assets in bankruptcy proceedings. However, it’s crucial to understand how bankruptcy might impact these payments and to take steps to protect them if you’re considering this option.
Understanding Bankruptcy and Exempt Assets
When you file for bankruptcy, you typically do so under either Chapter 7 or Chapter 13. Chapter 7 involves liquidating non-exempt assets to repay creditors, while Chapter 13 allows you to create a repayment plan based on your income and assets. Certain assets are considered “exempt,” meaning they are protected from being used to pay creditors. Disability payments often fall under this exemption category, but understanding the specifics of your situation and local laws can help ensure they remain protected.
Are SSDI and SSI Payments Exempt?
Under federal law, SSDI and SSI benefits are generally exempt from bankruptcy proceedings. In other words, they cannot be used to pay off creditors in a Chapter 7 bankruptcy or be factored into your disposable income for a Chapter 13 repayment plan. The Bankruptcy Code recognizes that disability payments are essential for meeting basic living needs, so they are often shielded from creditors.
SSDI Payments: SSDI benefits, based on your prior work history and funded through Social Security taxes, are typically protected in bankruptcy. They are considered necessary income, allowing you to maintain basic living standards.
SSI Payments: SSI benefits, intended for low-income individuals with disabilities, are also protected from bankruptcy proceedings. Since these funds are need-based, they are safeguarded from creditors, ensuring you have continued financial support.
When Could Disability Payments Be at Risk?
While disability benefits are generally protected, there are situations where disability payments might still be at risk. For instance:
Commingling of Funds: If you combine your disability payments with other sources of income in a single bank account, creditors or the bankruptcy trustee might have difficulty distinguishing exempt funds from non-exempt funds. To avoid this issue, keep your disability payments in a separate account solely for these benefits.
Overpayment of Benefits: If you received an overpayment from Social Security, the agency may request repayment. Filing for bankruptcy may not eliminate the need to repay this overpayment, as government debts are often treated differently from other types of debts.
Large Deposits in Bank Accounts: Regularly transferring large amounts of disability funds into an account that also holds non-exempt income can create complications. Trustees might question the origin of funds, so maintaining clear records and a separate account for disability payments is advisable.
The Impact of Chapter 13 Bankruptcy on Disability Payments
In Chapter 13 bankruptcy, you create a repayment plan based on your income. While SSDI and SSI benefits are exempt and cannot be seized to pay creditors, your income level may still play a role in calculating your monthly repayment amount. If disability payments are your sole or primary income, this can sometimes reduce the repayment obligations under Chapter 13, allowing you to create a more manageable repayment plan.
The Importance of Consulting a Bankruptcy Attorney
Navigating bankruptcy while relying on disability benefits can be challenging. A knowledgeable bankruptcy attorney can help you understand which assets are exempt and ensure your disability payments are protected. They will guide you through the nuances of the bankruptcy process and assist you in taking steps to safeguard these essential benefits.
Disability benefits are crucial for many individuals, providing financial stability and support in challenging times. While filing for bankruptcy can provide debt relief, it’s essential to understand how it may impact your disability payments and to work with an experienced attorney to protect your rights and benefits.
Call Tom Bible Law Today
If you’re considering filing for bankruptcy but worried about how it might affect your disability benefits, our experienced Chattanooga bankruptcy attorneys at Tom Bible Law are here to help.
Call us today at (423) 424-3116 to discuss your options and develop a plan that safeguards your financial future and protects your essential disability payments.