Student Loans and Bankruptcy

FAQs About Disability Payments And Bankruptcy

21 December 2015

Roy Sanders

Recipients of Social Security disability benefits are not exempt from their responsibility to past debts. If you are receiving disability or expect to, your benefits could be potentially impacted by filing for bankruptcy. Before filing for bankruptcy, here is what you need to know about your disability payments and bankruptcy.  

Is Disability Considered Income?

When you apply for bankruptcy, you have to pass a means test. The test determines how much income you have and if you meet the basic amount of income needed to qualify for bankruptcy. The amount varies from state to state. 

Income from Social Security disability benefits is not counted towards your income though. If you have little income outside of disability, at the least, you will probably still qualify to file for a Chapter 7 bankruptcy. 

Will Your Disability Payments Be Garnished?

A common misconception about filing for bankruptcy is that all of your income is automatically garnished or seized to help pay off debtors. Fortunately for recipients of Social Security disability, this is not true for disability funds disbursed at the federal level. 

Benefits received before and after the filing are protected. In fact, they are not considered to be part of your bankruptcy estate. However, it is up to you to prove that the funds you do have are from your disability payments. For instance, if you received a lump sum payment from the Social Security Administration, you can provide a copy of your statement from the agency to prove the source of the payment. 

What About State-Issued Funds?

If you are currently receiving disability at the state level, whether or not your funds are considered to be part of the bankruptcy estate depends on the state in which you live. Some states do consider state-issued disability payments to be part of the income tallied for a bankruptcy filing. As a result, you could lose part of the funds saved and some of the future savings. 

However, each state also offers exemptions. An exemption can be applied to an asset to cover its value and allows the bankruptcy filer to retain ownership of the item. You might be able to apply the exemption to your disability funds. 

To better assess your situation, consult with an experienced attorney (such as one from Morrison & Murff). He or she can provide detailed information on your state's laws and help you determine whether or not your disability benefits will be impacted by filing for bankruptcy. 

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