• 09
  • September
    2011

Even for individuals receiving Social Security payments, overwhelming debt can be a serious problem. But, whether you are receiving Social Security checks for age or disability, there are protections built into the bankruptcy code that keep you from being disadvantaged by your benefits in a bankruptcy filing.

Social Security Benefits Are Not Income in Means Test

Eligibility for a Chapter 7 consumer bankruptcy (a liquidation bankruptcy that eliminates almost all types of debt) depends upon a showing that you do not have a high income. A "means test" is applied to all debtors to gauge their ability to repay loans before a bankruptcy case may go forward.

Generally, if your household income falls below the median for similarly sized households in your state, you will be presumed to have met the means test (in Tennessee, for instance, the median income for a four-person household is $62,197 per year). However, even if your income is above the median, you can still qualify under the means test if your disposable income is lower than a certain portion of your debt (the amount is calculated by the application of a complex formula).

The lower your income, the more likely you are to qualify for Chapter 7 bankruptcy protections. But, if you receive Social Security benefits, you should not panic: Social Security payments are specifically excluded from income for purposes of the means test.

A bankruptcy court may scrutinize your Social Security payments to determine whether your Chapter 7 filing is being made in good faith. Even so, if a large portion of your financial support is derived from Social Security benefits, you are likely to qualify for Chapter 7 bankruptcy under the means test.

Pre-Medicare Could Be Ideal Time to File For Bankruptcy

If you have health problems and are about to sign up for Medicare, bankruptcy could be an attractive option.

Medical expenses are one of the top reasons many bankruptcy filers cite as the source of their debt problems. Although your Medicare coverage should help cover post-bankruptcy medical costs, you may want to take the opportunity to eliminate your medical debt now before your full retirement benefits kick in.

The relationship between Social Security benefits and bankruptcy filings can be complex. If you are struggling with debt and receiving Social Security payments, ask a Nashville bankruptcy attorney how you can best take advantage of the protections offered by the bankruptcy code.