Will I Lose My Social Security In Bankruptcy If I File Chapter 7 in Oklahoma?

Social Security In Bankruptcy

In difficult financial times, when income is not keeping up with expenses, you may consider filing for bankruptcy. You may wonder whether you will lose your social security benefits if you file for bankruptcy. Social security benefits are exempt assets protected from being drawn on in bankruptcy to pay creditors. The federal process of bankruptcy has strong protections for exempt assets. This assures people who file for bankruptcy can keep some essential items. The Social Security Administration has said they will not honor any court order to deliver social security benefits to a bankruptcy trustee. 

An Important Exception Affecting Social Security Money

One important exception to the rule that social security benefits are exempt from the bankruptcy process is a case where the social security funds have been mixed or co-mingled with non-exempt money in a general household bank account. For example, if your social security money is mingled in an account with other family income, those funds may become part of your bankruptcy estate and could be drawn on to pay creditors. 

Two Main Types Of Bankruptcy

The two main types of bankruptcy that most individuals file are called Chapter 7 and Chapter 13. The critical distinction between the two is that Chapter 7 is considered a liquidation. That is, the bankruptcy process will take non-exempt and sell it to get money to pay back creditors. Most assets you have like your home and car are considered exempt. In both kinds of bankruptcy the house you live in is exempt from creditors. In bankruptcy most if not all of your unsecured debts are forgiven. Chapter 13, on the other hand, is a repayment plan, allowing the bankruptcy filer to keep many assets but with an agreement to a payment plan that can eliminate the debts over time.

Social Security In Bankruptcy and Its Process

An automatic stay comes into effect when the bankruptcy is filed, which stops all creditors from taking any collection efforts related to assets or income. Some financial obligations are mandatory and can’t be avoided by bankruptcy or any other type of legal protection. Examples of these types of debts that will not be affected by bankruptcy include the following:

  • Child support
  • State and federal taxes
  • Student loan obligations
  • Overpayments from government sources that must be paid back

On the other hand, there are forms of income and benefits that creditors are generally forbidden from collecting, including income from the following sources:

  • Workers’ compensation payments
  • Veterans benefits
  • Unemployment compensation 
  • Child support payments 
  • Typical retirement and pension plan payments
  • Social security benefits
  • Personal injury compensation

It is true that these sources of income have special protections in bankruptcy. The protection shields them from the collection for payment of debts. Usually its up to the person who owes money to explain to the judge that money comes from these exempt sources. The best thing to do with any exempt sources of income is to set up a separate bank account. Never put any other money in this account except the exempt money. This guards against co-mingling of funds.

Reporting Requirements In Bankruptcy

Even benefits that are exempt in bankruptcy are usually required to be listed in the income reporting process. Both types of bankruptcy, Chapter 7 and Chapter 13, include a “means test”. This is done to analyze the income and assets of the person filing. This determines if they qualify for the program. Both bankruptcy processes involve a form called Schedule I. Schedule I requires a reporting of total income — social security income must be reported on this form. 

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