How Does Bankruptcy Affect Disability Benefits?


When you accumulate too much debt and can no longer pay your bills, you may file for bankruptcy to help repay your creditors. This could impact your financial standing in many ways, but fortunately, Social Security benefits are not affected by default by federal law.

Social Security Disability benefits are considered exempt assets, meaning creditors cannot tap them when the beneficiary files for bankruptcy. However, there could be a few exceptions, depending on which bankruptcy code you use to file. Usually, those filing for bankruptcy use Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code.

Chapter 7 is a liquidation where the individual’s nonexempt assets become available to a trustee to be sold to and distributed to creditors. 

Chapter 13, also called the wage earner’s plan, enables those with a regular income to develop a plan to pay off all or some of their debts over time (usually three to five years). This option is not available to those who use Chapter 7.

Reporting Bankruptcy Income and Disability Benefits

You could unintentionally compromise your benefits while filing for bankruptcy by reporting your income. Chapter 13 submission forms require you to take a “means test” to compare your monthly payment to the median in your state and determine your disposable income and how much you must pay your creditors monthly. You are required to include Social Security benefits in your income filing, which won’t be included in the calculation of your disposable income.

You also must include your benefits in a Chapter 7 filing, in a means test similar to Chapter 13. However, the court may determine that prior Social Security benefits deposited into your bank account are part of the bankruptcy estate – or the property you own before filing. This can be distributed to creditors, especially if they’re commingled with other funds like your wages.

Bankruptcy and Disability Back Pay

While your disability benefits are off-limits to creditors, a trustee in a Chapter 7 case may go after your unspent disability payments and backpay if mixed with other money in an account. These commingled funds could be considered part of your bankruptcy estate and distributed to creditors. This would not occur in a Chapter 13 case, however, since the debtor keeps all deposited funds. For more information about disability benefits and backpay, and how they apply to bankruptcy, speak with the reputable Social Security Disability attorneys at DA Michigan today.

SSD Attorneys Who Care About Your Financial Future

The Social Security Disability application process is complex, and as a claimant, what you don’t know could cost you. That’s why it’s our mission to ensure and secure the benefits you need to get by, now and moving forward. If you have recently become disabled and need help, we’re ready to assist you. Contact us today by submitting a contact form below or calling our office toll-free at 800-949-2900 for a free consultation.

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I will never forget you and the hard work you did to secure my Social Security Disability benefits. Thank you!

- Christine C.