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How Social Security Income Affects Bankruptcy

Social security income documents

Many Americans with limited income receive Social Security benefits.  When faced with mounting debt, people may be concerned that exercising the option of bankruptcy will disrupt or end Social Security payments, leaving them with no source of income, or that their Social Security payments will disqualify them from bankruptcy.  Below we explain how Social Security income affects bankruptcy and how they interact in Chapter 7 and Chapter 13 bankruptcies.  Reach out to an experienced Maryland debt relief lawyer with any questions or to discuss your financial needs.

Chapter 7

Chapter 7 bankruptcy is aimed at people who are unable to pay back unsecured debt such as credit card debt, medical bills, or personal loans.  Chapter 7 bankruptcy involves the liquidation of almost all of your assets and property, with some exceptions.  A bankruptcy trustee will oversee the liquidation and sale of your assets in order to repay your creditors.  Your attorney will work the Maryland bankruptcy exemptions to keep as much of your assets as possible safe from liquidation, with the goal of obtaining a “no-asset” bankruptcy on your behalf.

Chapter 7 “means” test:  SSI can affect whether you qualify

If you are able to pay back some or all of your debt without bankruptcy (i.e., if you have “the means” to repay your creditors), then you may not be eligible to file Chapter 7.  Your “means” is determined based on your income.  You do not have to include Social Security income as part of your income for the purposes of a Chapter 7 means test.  All of your other sources of income from the prior six months will be incorporated into your means test. 

If your current monthly income (CMI) is below the median income for similar Maryland households, then you will automatically pass the means test.  If your CMI is above the median, you may still qualify, depending on your answers to the rest of the questions in the means test.  While your Social Security income is not included in the means test, it will still be disclosed as part of your budget in several of the bankruptcy filing schedules (Schedules I and J). 

Social security payments may still, however, affect your eligibility for Chapter 7:  If you are receiving significant disposable income, you may not qualify for bankruptcy even if you pass the means test.  But, if you do not qualify for Chapter 7, you may still qualify for Chapter 13 bankruptcy.

Chapter 13:  SSI may affect your payment plan, but the appellate court held it should not be part of “disposable income”

Chapter 13 bankruptcy is designed to create a repayment plan without liquidating your assets.  In exchange for being able to keep your property, you agree to a repayment plan, typically three or five years long, through which you will repay your creditors in full or in part.  At the end of the period, the court will wipe out remaining balances on qualified unsecured debts, with exceptions. 

Your repayment plan will depend on your income and expenses.  The Chapter 13 means test considers how much disposable income you can afford to pay.  Like Chapter 7, you will fill out a “current monthly income” statement that is part of the means test, which will be used to determine how much disposable income you have to pay priority unsecured debt, such as credit cards, medical bills, and personal or school loans.  Social Security benefits are not considered part of this income. 

However, like with the Chapter 7 forms, you will have to report your Social Security payments on other related schedules.  These other schedules can be used to increase your disposable income, which may affect how much you pay your creditors as part of your repayment plan.

Many courts will incorporate your Social Security income into the calculation of your disposable income, which can affect how much you pay your creditors each month.  Whether you will get to keep some or all of your Social Security income depends on the particular court.  The Fourth Circuit Court of Appeals, which governs bankruptcy courts in Maryland, has previously held that  Social Security income should not be included in calculating disposable monthly income in Chapter 13 cases.  The court also noted, however, that Social Security income could be relevant to the “feasibility” of a Chapter 13 repayment plan.  Consult with an experienced bankruptcy attorney to determine how your Social Security income may affect your Chapter 13 repayment plan.

If you’re struggling with debt in Maryland and want help getting back on the right financial footing, contact an effective and dedicated Germantown bankruptcy lawyer at Haeger Law for a no-cost consultation at 888-463-3520.