Two Rare Exceptions When The Banruptcy Trustee Can Take Your Social Security Disabilty Payments

Typically when you file bankruptcy, your income and savings becomes part of your bankruptcy estate. The trustee will take any non-exempt funds and use them to pay off your creditors. Most of the time, social security disability income is protected from this type of trustee action by both bankruptcy laws and the Social Security Act. However, there are two times when the trustee can take that money. Here's more info about these exceptions.

Lump Sum Payments

The automatic exemptions provided by bankruptcy laws and Social Security typically only apply to the monthly payments you receive going forward. If you receive a lump sum payment from the Social Security Administration for past benefits owed to you, you may be required to turn part of that money over to the bankruptcy court. Whether or not you have to depend on a few factors:

  • When you receive the money
  • The amount you receive
  • The bankruptcy court in your area
  • The exemption laws in your state

Where you live will have the biggest impact on whether you'll be made to turn over some of the money from your lump sum payment. Many bankruptcy courts consider any type of SSDI income to be untouchable. In other courts, however, the bankruptcy trustee will calculate the amount of money required to pay your basic needs (housing, food, and support) and take anything left over.

For instance, if you receive a $20,000 lump sum from the Social Security Administration and the trustee calculates your living expenses to be $15,000, he or she will require you to hand over the remaining $5,000 to pay your creditors.

Sometimes you can use the exemptions available in your state to protect that income. For instance, Maryland has a $6,000 wildcard exemption that can be used to protect cash or property from being seized by the trustee. You could use that exemption to cover the remaining $5,000 in the above example.

When you receive the money will also impact its exemption status. Money you receive from the Social Security Administration after you file bankruptcy is typically protected. However, lump sum payments received prior to filing may not be. Again, this depends on where you live.

For example, in a 2008 court case, the Minnesota bankruptcy court ruled that the person could not use the federal bankruptcy exemptions to protect the $17,000 he had received prior to filing a petition and still retained. According the judge's interpretation, the law only protected future money received from the SSA.

The laws can get complex when dealing with lump sum social security disability payments, so it's essential that you work with a bankruptcy attorney to find ways to protect your benefits.

Comingled Funds

Another way the bankruptcy trustee can come after your social security disability payments is if you comingle the funds with other non-protected money. If you deposit your SSD checks into the same account as your regular paychecks, for example, then the trustee may make the argument that you can't determine which money in your bank account came from the Social Security Administration and which came from your place of employment. This is particularly true if you don't keep good records.

As with lump sum payments, you can protect comingled funds using bankruptcy exemptions. If you've been saving the money and haven't spent any of it, you could submit copies of check stubs or your bank statements (in the case of direct deposit) to show how much of that money came from your social security disability benefit.

If you receive social security disability and you're concerned the trustee may try to take some of your money, contact a social security disability attorney for assistance.

About Me

Just What Can a Bankruptcy Attorney Do For You

I never thought that I would personally be dealing with a bankruptcy situation. However, we found ourselves in a situation where filing for bankruptcy was the best option for moving forward. There are many different types of bankruptcy that a person or a business can file for. Additionally, there are attorneys that specialize in dealing with different types of bankruptcy situations. Figuring out what option to go with can a bit tricky and intimidating for the average person. The purpose of this blog is to assist you in figuring out what you need to do and which type of attorney you need to hire to assist you with filing for bankruptcy.