Effects of Social Security Benefits in a Bankruptcy Proceeding

What are the effects of social security benefits in a bankruptcy proceeding? That depends on whether you are filing a Chapter 7 Bankruptcy or a Chapter 13 bankruptcy.

Effects of Social Security Benefits in a Chapter 7 Bankruptcy

In Colorado, and elsewhere, social security benefits are exempt in a bankruptcy proceeding. This means the Chapter 7 bankruptcy trustee cannot grab the payments or benefits and make them part of the bankruptcy estate. Further, they are not considered income to be included in the means test. The means test is used in part to determine if the debtor’s annual income exceeds the median annual income for the state of Colorado and whether you should be in a Chapter 13 bankruptcy instead of a Chapter 7 bankruptcy. Hence, there will be instances where a debtor qualifies for a Chapter 7 and is not forced into a Chapter 13 because the social security income is not counted in the means test.

However, monthly social security income is included in Schedule I (current monthly income), of the bankruptcy Voluntary Petition. Schedule I, Line 8.e. specifically requires the debtor to list monthly social security income. Where Schedule I is the list of monthly income, Schedule J in the bankruptcy Voluntary Petition is the list of current monthly expenses. The Chapter 7 Trustee and the U.S. Trustee’s office will compare Schedules I & J to see if the monthly income exceeds the monthly expenses. If there is sufficient monthly income remaining after monthly expenses then the U.S. Trustee, a creditor, or the Chapter 7 Trustee may move to dismiss the bankruptcy.

Effects of Social Security Benefits in a Chapter 13 Bankruptcy

A Chapter 13 can be beneficial in certain instances, and preferable to a Chapter7. Chapter 13 allows you to keep the assets you wish to keep and make monthly payments to the Chapter 13 Trustee. Chapter 13 requires regular income as one of the qualifications. Social Security benefits are considered regular income and may allow you to qualify for a Chapter 13 bankruptcy.

In Chapter 13, the means test is used in part to determine if you will be subject to a 60-month plan or a 36-month plan. If the means test annual income is less than your state’s median annual income, you can propose a 36-month plan. You can also use your actual monthly expenses in determining your disposable income, and the monthly Plan payment.

If the means test annual income is more than your state’s median annual income for similar household size, you are required, with some exceptions, to propose a 60-month plan. In addition, the expenses you can claim will be mostly limited by national and local standards. Once again, then, the exclusion of social security income from the means test can result in substantial savings to the debtor.