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Social Security benefits are exempt and therefore protected in bankruptcy, so you can keep your Social Security benefits if you file for bankruptcy in New York. An important strategy though, is to maintain your benefits in a separate account to avoid comingling with other assets so that your bankruptcy filing can go smoothly, and so you can take advantage of all applicable exemptions.
How Chapter 7 and Chapter 13 Bankruptcy Work
Most consumers file one of two types of bankruptcy—either Chapter 7 or Chapter 13. Here are a few of the differences between the two.
Chapter 7 Bankruptcy
This is the preferred chapter when you have few assets because you will have to turnover to the trustee those assets that exceed the allowable exemptions. These exempt assets include a car, worth under $5,000, a bank account, with small balances, and other types of personal property. To qualify for Chapter 7 bankruptcy relief, you must pass something called the "means test," which looks at your income and expenses.
Chapter 13 Bankruptcy
If you earn too much to qualify for a Chapter 7 discharge, you might have to file for Chapter 13 bankruptcy instead. In Chapter 13 bankruptcy you’ll keep all of your property and pay into a three- to five-year repayment plan. You’ll need to demonstrate that you have sufficient income to make your monthly plan payments. (You can find out more in Chapter 13 Bankruptcy.)
Listing Property in Your Bankruptcy Papers
You must disclose all your assets on your bankruptcy petition, regardless of whether the money is in a bank account, a safe deposit box, or stuffed in your mattress. When you receive your Social Security funds and it goes into your bank account, its changes into property, and you must list it on your bankruptcy petition.
Examples of other types of property you must disclose in bankruptcy include:
- cash
- money in investment, retirement, and bank accounts
- real property, including your primary home, any rentals, and vacation property
- hobby and sporting equipment
- jewelry, such as wedding rings, and
- anything else you own, including your pets.
Social Security Benefits Are Exempt Property
New York's include many of the items listed above, but not all of them are completely exempt. Although you’ll get to keep most necessary household items and a modest car, there’s no guarantee that everything will remain yours. The primary role of the Chapter 7 bankruptcy trustee is to liquidate (sell) all of your non-exempt property and distribute the proceeds to your creditors. If your state says you can keep a particular item, you do so by declaring it “exempt.” New York's exemptions provide an exemption for Social Security benefits.
Don't Commingle Social Security Money With Other Funds
When you declare that certain funds are exempt from bankruptcy (you do this in your bankruptcy papers), it’s your responsibility to prove your right to retain the money. Just because you claim that a portion of your bank account balance is exempt Social Security benefits doesn’t mean that the bankruptcy trustee will believe you—especially if you’ve mixed the benefits with other funds in the same account (called commingling). Commingling makes it difficult to prove which funds are exempt.
Keeping a Separate Social Security Account
Keeping your Social Security benefits in a separate account that you use exclusively for those funds is a good practice to prevent commingling issues. It allows you to trace the source of the funds to your Social Security check or an automatic deposit from the Social Security Administration. This is a good idea, even if you aren't contemplating bankruptcy. It makes it easier to protect your Social Security money from creditors' efforts to collect judgments.
It also makes it possible to maximize your exemptions. Classifying exemptions accurately can make it possible to not only protect your Social Security, but also the additional amount deposited in the bank from other sources. The more your can classify as exempt, the more you can keep!
What to Do If You've Commingled Funds
If you’ve already commingled your funds, there are a few ways to handle the situation. Here are some strategies you may want to consider:
Before filing for bankruptcy. If you haven’t filed bankruptcy yet, you might want to open an account that you use solely for your Social Security benefits. Then consider exhausting the commingled funds in your other account before filing bankruptcy by using them to pay for necessities of life, such as rent, utilities, and food.
After filing for bankruptcy. If you’ve already filed bankruptcy, or cannot wait to exhaust the commingled funds, you might be able to use another exemption.
Chapter 7 & 13 New York Bankruptcy Attorneys Here For You
At Alatsas Law Firm, we take the time to review all the accounts and sources of income in order to maximize all exemptions. Prior to filing, we look at accounts, income streams, award letters, and expenses, to make sure that when the petition is filed, our client gets the benefit of every possible exemption. Call us at (718)233-2903 or contact us to learn more about bankruptcy and how we can help.
