Are Disability Benefits Protected in Bankruptcy?

by: Baran Bulkat, Attorney

If you are receiving disability payments, your benefits may be considered an asset in bankruptcy. In most cases, disability benefits are protected in bankruptcy through state and federal exemptions. But there are exceptions. How your disability benefits will affect (or be affected by) your bankruptcy depends on:

• whether you file for Chapter 7 or Chapter 13 bankruptcy
• whether your benefits are through Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI), or a state, private, or other program
• whether you receive ongoing payments or a lump sum payment for past benefits, and
• the exemption laws of your state.

Are Disability Benefits Protected in Chapter 7 Bankruptcy?

In Chapter 7 bankruptcy, almost all of your property is considered property of the bankruptcy estate. This means that the bankruptcy trustee can take your nonexempt assets and sell them to repay your creditors. In most cases, state and federal bankruptcy exemptions protect your disability benefits from the Chapter 7 trustee. But the extent to which your benefits are protected depends on the source of your payments.

Social Security Disability Insurance (SSDI) Benefits

In general, both Social Security and bankruptcy laws protect your SSDI benefits if you file for Chapter 7 bankruptcy. If you receive ongoing monthly disability payments from SSDI, you will normally be allowed to keep your payments. In most cases, debtors need these benefits to support themselves and their dependents while they are unable to work. As a result, they are typically protected by both state and federal exemptions.

If you receive a lump sum payment for past disability benefits owed to you, you will have to trace the deposit and prove that it was an SSDI payment. Generally, all SSDI payments are protected in bankruptcy because they are received under the Social Security Act. However, certain bankruptcy jurisdictions have created an implied exception to this general rule. In those jurisdictions, the Chapter 7 trustee may be able to take the portion of your lump sum payment that exceeds the amount needed for your basic care, support, and maintenance.

Keep in mind that the interaction between bankruptcy and Social Security laws can be complicated. If you are unsure about how bankruptcy will affect your disability benefits, talk to a knowledgeable bankruptcy attorney in your area prior to filing your case.

Supplemental Security Income (SSI) Benefits

SSI disability benefits are designed to help disabled individuals with their basic care and maintenance such as food, clothing, and shelter. In general, only individuals with little or no income qualify for SSI benefits and the Social Security Administration has strict regulations on what these benefits can be used for. As a result, SSI benefits (including lump sum payments provided you can trace the funds to their source) are exempt in bankruptcy under federal law.

Disability Benefits from State, Private, or Other Programs

Disability benefits received through state, private, or other programs do not receive the same protection as payments received through Social Security. Each state has its own bankruptcy exemption system that allows debtors to keep a certain amount of property in Chapter 7 bankruptcy. The amount of disability benefits you will be allowed to keep depend on the exemption laws of your state.

Most states allow debtors to keep a certain amount of disability benefits in Chapter 7 bankruptcy. But the exact figures differ greatly from state to state. As a result, review your state's exemptions carefully or talk to a bankruptcy attorney prior to filing your case.

How Are Disability Benefits Treated in Chapter 13 Bankruptcy?

In Chapter 13 bankruptcy, you get to keep all of your property in exchange for paying back all or a portion of your debts through a repayment plan. Unlike in Chapter 7 bankruptcy, the trustee does not sell your nonexempt assets to pay back your creditors. But any nonexempt assets increase the amount you have to pay unsecured creditors through your repayment plan.

If the court determines that a portion of your disability benefits is not exempt, you will have to contribute that amount towards your unsecured debts. Further, your disability payments must be disclosed in your bankruptcy budget and will be taken into account when determining how much your monthly plan payments should be.