Social Security and Bankruptcy Protection

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Federal bankruptcy protection is extended to certain exempt assets which include social security. This protection prevents Social Security benefits to be taken by a trustee in a bankruptcy action. However, problems arise where the Social Security benefits are in lump sums sitting in a bank account or

Bankruptcy Code - Social Security benefits exemption

Under Title 11 § 522 of the Bankruptcy Code Social Security benefits are exempt from bankruptcy creditors. The expressed language states "the right to receive" which translates that this benefit may not be intercepted before the beneficiary receives it. Also, the benefits cannot be taken directly from the beneficiary either. Under the code most retirement plans, pensions and 401(k) plans are exempt from collection.

Social Security benefits are also protected under the Social Security Act.

Section 207 of the Social Security Act provides that:

  • The right of any person to any future payment under this title shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.
  • No other provision of law, enacted before, on, or after the date of the enactment of this section may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference to this section.
  • Nothing in this section shall be construed to prohibit withholding taxes from any benefit under this title, if such withholding is done pursuant to a request made in accordance with section 3402(p)(1) of the Internal Revenue Code of 1986 by the person entitled to such benefit or such person's representative payee.

Potential problems with Social Security benefits and bankruptcy

Certain ambiguities may call bankruptcy protection for Social Security benefits under question. In Carpenter v. Reis, 20 CBN (8th Circuit 2010), the 8th Circuit Bankruptcy Appellate Panel ruled that the Social Security disability payment received by the beneficiary (Mr. Carpenter) was not protected under 11 U.S.C. Section 522(d)(10) of the Bankruptcy Code because it was a benefit that the beneficiary had already received. However, the same court also ruled that the Court ruled that the benefits were protected under Section 42 U.S.C. Section 407, which provides that past or present Social Security payments are not subject to bankruptcy law. Other potential problems include:

  • the different treatments of Social Security disability and Social Security retirement; and
  • Social Security benefits voluntarily transferred from the beneficiary to an ex-spouse or child as part of a divorce settlement.

Talk with an Attorney

If you are facing bankruptcy and receive Social Security benefits, basically these benefits are protected under both the Bankruptcy Code and the Social Security Act. However, there may be potential problems under limited circumstances. Talk with an experienced bankruptcy attorney to discuss your case.