Are Disability Benefits Affected by Bankruptcy?

If you are considering bankruptcy while receiving disability benefits, you may be wondering how bankruptcy proceedings could impact your benefit payments. After all, would bankruptcy really be worth it if you ended up losing a major part of your income?

While disability benefits are generally protected in bankruptcy cases, there are several possible exceptions based on factors such as:

  • How you file for bankruptcy (under Chapter 7 or Chapter 13)
  • Whether you receive benefits from Social Security Disability, Supplemental Security Income, or another source
  • Whether you receive monthly benefit payments or took a lump sum

The Impact of Chapter 7 Bankruptcy on Disability Benefits

Chapter 7 bankruptcy, sometimes referred to as “liquidation” bankruptcy, involves selling off your non-exempt assets to pay a bankruptcy trustee. In exchange, the bankruptcy trustee pays off your creditors and discharges, or wipes out, your unsecured debt.

To qualify for Chapter 7 bankruptcy, you must demonstrate that your income is below the state median or pass a means test. If SSDI or SSI benefits are your main source of income, chances are you meet the eligibility requirements for Chapter 7.

Generally speaking, bankruptcy laws and Social Security laws say your disability benefits are exempt assets. However, the question of how your disability benefits will be treated during Chapter 7 bankruptcy proceedings depends on the type of benefits you receive.

If You Receive SSDI Benefits

Your Social Security Disability Insurance (SSDI) benefits are typically protected in Chapter 7 bankruptcy. If you receive your benefits on a monthly basis, you can usually keep the full payment amount since the law assumes you need these benefits to support yourself and your dependents.

However, if you have received a lump-sum payment for SSDI benefits in the past, things can get a little more complicated. While lump-sum SSDI benefits should be protected, the bankruptcy trustee may have no way of knowing how much of the money in your accounts is from Social Security. This means you may need to do some detective work to dig up proof of the deposit amount so you can show that a portion of your assets is from SSDI benefits.

However, keep in mind that in certain jurisdictions, Chapter 7 trustees may have the authority to take a portion of your lump sum if they determine it’s more than you need to support yourself. A knowledgeable bankruptcy attorney can help you understand the often complex interplay between bankruptcy and Social Security law in your area.

If You Receive SSI Benefits

SSI benefits are provided to help low-income individuals who can’t work afford basic necessities and shelter. The Social Security Administration (SSA) has specific regulations describing who qualifies for SSI benefits and how recipients may use their SSI benefits.

Due to these strict federal rules, SSI benefits are fully exempt during bankruptcy. This includes money from both monthly SSI payments and lump-sum payments, as long as you can show which portion of your current assets came from SSI benefits.

If You Receive Disability Benefits from a State or Private Program

If you are receiving disability benefits from a state program, a private program, or any other non-federal program, those benefits are not protected in the same way Social Security benefits would be protected. A North Carolina attorney can help you review the state’s Chapter 7 bankruptcy exemptions to determine whether your disability benefits would be considered exempt.

The Impact of Chapter 13 Bankruptcy on Disability Benefits

Chapter 13 bankruptcy is commonly referred to as the “wage earner’s” bankruptcy. Chapter 13, which is typically more complicated and time-consuming than Chapter 7, involves developing a three- to five-year plan to pay off a portion of your debts in exchange for having most of your unsecured debts discharged.

If your disability prevents you from earning a regular wage, you may not qualify for Chapter 13 in North Carolina. However, if you are eligible, you typically get to keep all of your assets as long as you complete your repayment plan.

Although you are not expected to sell your nonexempt assets in Chapter 13, any nonexempt assets you have could have a significant impact on your repayment plan. And if the court decides that some portion of your disability benefits are not exempt, it could increase the amount of money you have to pay the bankruptcy trustee each month as part of your plan.

Contact a Knowledgeable Bankruptcy Attorney in Raleigh

If you are concerned about how bankruptcy could affect your disability benefits in North Carolina, the experienced Raleigh consumer bankruptcy lawyers of Bradford Law Offices, PLLC can help. Call us today at (919) 758-8879 or contact us online to discuss the details of your situation with a qualified attorney in your initial consultation.