September 1, 2014

Will Filing a Bankruptcy Affect My Social Security Disability Case?

In my law practice, I have handled both bankruptcy and Social Security disability cases.  Unfortunately, with delays in the Social Security system approaching 3 years, more and more of my disability clients find themselves considering bankruptcy.

What happens, therefore, if you decide to file for bankruptcy while you are waiting for your Social Security decision?  What happens if your SSDI or SSI case is approved the week after you file for bankruptcy?  Can you keep your past due “lump sum?”  Does your attorney get paid?

If you have a pending Social Security application, you need to let your bankruptcy lawyer know about it.  Bankruptcy lawyers hate surprises and pending Social Security benefits are certainly relevant to a bankruptcy evaluation.

Under the current bankruptcy law, Social Security benefits are not countable for means test purposes but they may be countable for budget purposes.  So, if you do get approved for benefits while your bankruptcy is still active, you may need to amend your budget.

In my view, bankruptcy works best when there are no changes during the course of your case – whether you file Chapter 7 or Chapter 13.  The addition of, say, $1,500 per month to a bankruptcy budget will change things and you need to know in advance what this change will mean.

The question on the mind of most Social Security applicants has to do with the lump sum payment – which represents months or years of “past due benefits.”  Can you keep this lump sum?  The answer is “it depends.”  It depends on your State’s exemption laws and the practice and procedure in your local bankruptcy court.

In the Northern District of Georgia, where I practice bankruptcy, I have successfully argued that my client’s Social Security disability payments are exempt assets pursuant to Georgia’s exemption statute, which makes exempt a “debtors right to receive a Social Security benefits.”   I take the position that the monthly benefits would have been exempt and that the debtor should not lose his lump sum check because Social Security took two to three years to issue payment.

Every State has its own exemption rules.  And every bankruptcy filing jurisdiction has most likely reached a consensus about this issue.   I suspect that in some jurisdictions, the trustee will ask for some of the lump sum.  Perhaps there are some where the entire lump sum is in play.  The point – ask your bankruptcy lawyer.  It may change when your file and what bankruptcy chapter you choose.

Similarly, you need to tell both your Social Security lawyer and your bankruptcy lawyer about both cases.  Your Social Security lawyer is entitled to get paid for his efforts.  He may need to file a special application in bankruptcy court to be approved as special counsel.  He may also need to file a motion for approval of his fees.

The bottom line: advise both your bankruptcy lawyer and your disability lawyer about your respective cases.  Ask your lawyer to sketch out in writing what you can expect.  I can imagine nothing more frustrating than to hang on for three years waiting for that past due benefit check, only to find that a trustee has grabbed it.

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Jonathan Ginsberg represents Social Security disability claimants in Georgia. In practice for over 23 years, Jonathan publishes a widely known disability blog, a podcast and several disability web sites. In 2004, Jonathan published a "how to" book about Social Security disability called the Disability Answer Guide. Jonathan lives with his wife and 2 children in Atlanta.

Comments

  1. Why wouldn’t the social security benefits – including a lump sum – be entirely exempt pursuant to 42 U.S.C. Sec. 407(a)?

  2. Jonathan Ginsberg says:

    Tim, I am speaking about the lump sum payment. Payments to the trustee are voluntary, and not the same thing as an involuntary garnishment. Imagine a situation where a debtor receives a lump sum payment of $30,000 representing past due benefits. In Georgia, the exemption statute is somewhat vague – would the appropriate exemption be 44-13-100(a)(2)(A) or would it be 44-13-100(a)(2)(E)? (see http://cli.gs/SYET5y) Assuming that the lump sum is exempt “to the extent reasonably necessary for the support of the debtor”(subsection E) the trustee could and would argue that some of that lump sum should go to the Ch. 13 trustee or to the bankruptcy estate in a Ch. 7.

  3. Thanks for the reply.

    I guess I just read 42 U.S.C. Sec. 407(a) more broadly. While certainly there is a provision there about involuntary transfers, that does not seem to be the entire scope of the non-alienability of Social Security benefits. As I read it, with the inapposite clauses removed, it reads as follows:

    “The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable . . . shall be subject to . . .the operation of any bankruptcy or insolvency law.”

    It seems as this would apply to any lump sum distribution, either already received or one that is expected.

  4. Hi. Anyone have any thoughts on the following?
    My chapter 7 case is pending in the district of new jersey. I filed the petition in late august and the section 341 meeting was held in early october. About two weeks ago, i finally got approved for disability. I found this out when my bank balance suddenly increased by $44K. My attorney has assured me that none of the SSA payments (including the amount of the lump sum allocable to the prepetition period) is subject to the claims of creditors or subject to the jurisdiction of the bankruptcy court on the grounds that the preptition portion of the lump sum constitutes property of the estate.

    Guestions:
    1. I do not know exactly what is meant by “[u]nder the current bankruptcy law, Social Security benefits are not countable for means test purposes but they may be countable for budget purposes.” Is this a back-door way by which the creditors can obtain post-discharge payments on the ground that a “reasonable” budget for the debtor leaves value in the debtor’s hands that should be available to satisfy creditors’ claims? If not, exactly what is the affect of disclossing the monthly payments and the receipt of the lump sum on the rights and obligations of the debtor?

    2. As I understand the way the code works, section 541 includes as property of the estate of a chapter 7 debtor only that property in which the debtor has an interest or right in as of the petition date; i.e., property received postpetition does not become property of the estate reachable by creditors. I assume that the argument that a lump sum benefit is property of the estate is that the income was “earned” in the months before the filing.

    A. Does the fact that that the IRS/SSA expressly prohibit reallocating lump sum benefits to tax years ended before receipt of the disability payments and require it to be taxed in the year of receipt make any difference under the Code?.

    B. Is it true that a debtor has no cognizable interest (whether legal or equitable) in potential disability payments that may or may not be awarded/paid after the filing of the petition?

    MTIA

  5. Irv Mermelstein says:

    On the 42 USC 407 question, the lead case is Philpott v. Essex County Welfare Board,409 U.S. 413 (1973). I think its pretty safe to say that the lump sum payment is safe from the trustee because the payment is not part of the estate. But I agree with Jonathan that there is still a question whether it would affect a repayment plan in Ch 13. The cases I have looked at are Ch 7 cases, though the holdings are relevant to Ch 13 as well.

    I wonder how one should make any disclosure to the trustee. Even if the payment is not part of the estate, the trustee is going to feel blindsided if he only hears about it in an objection from a creditor.

  6. I guess my main concern is what has happened to my credit rating while waiting the lengthy time to recieve benefits. Even with the “lump sum” payment I recieved after gladly paying the lawyers, still left my creditors with a sour taste in their mouths.
    After following a somewhat disiplined monthy battle with the creditors, I still find myself behind the eight ball with a credit score hovering in the low 500′s
    With the SSDI being a federal based program, I feel some sort of help from the government would be in order to help protect the disabled credit score prior to the fileing for disability. Don’t pay my bills, just give me back my good credit!

  7. Samantha faulkner says:

    Hi my name is samantha faulkner, I want to file bankuracy. I tryd to settle my debts by paying off the creditors. I gave all I can in doing so I neglected my pown bills as well.

  8. I was just wondering… If I am already on disability and have been for quite some time now and I file for bankruptcy will I lose my disability..??..And will it make my credit good again..??..

  9. Do your answers apply strictly to SS disability, or for regular SS also?If you are reaching SS age, and considering bankruptcy as well, does the potential SS income effect the calculations of the bankruptcy?

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