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Filing for bankruptcy does not affect your eligibility for Social Security or the amount of benefits you can receive. Social Security payments do, however, have the potential to affect bankruptcy proceedings.
If you are receiving Social Security benefits when you file for bankruptcy, the court may consider them when evaluating your ability to repay creditors. If you combine funds from Social Security in the same account with money from other sources, those funds may be at risk of forfeiture to pay your creditors.
Can Bankruptcy Affect Your Social Security Payments?
Filing for bankruptcy does not affect your ability to qualify for Social Security retirement benefits, nor does it affect:
- The amount of your current or future benefits
- The frequency of current or future Social Security payments
How Is Social Security Income Considered in Bankruptcy?
Social Security income is considered exempt from forfeiture in bankruptcy, so the court cannot garnish Social Security benefits for purposes of repaying your debts. Nevertheless, the court will require you to document Social Security benefits, along with any other sources of income and your monthly expenses. You'll do this by submitting the means test required of all individuals and couples filing for bankruptcy.
Chapter 7
A means test can determine eligibility for Chapter 7 bankruptcy, which erases (or discharges) many forms of debt after you forfeit assets (with certain exceptions) that are sold to repay your creditors. If the means test finds your income exceeds the median income for a household your size in your state or jurisdiction, you may not qualify for Chapter 7 bankruptcy.
If you file Chapter 7 bankruptcy, any proceeds from Social Security benefits you've mixed with money from other source(s) in a savings or checking account may be subject to forfeiture to help satisfy your debts. Depositing Social Security funds into a dedicated account can prevent this from occurring.
Chapter 13
In Chapter 13 bankruptcy, a repayment plan is established to provide full or partial repayment to your creditors, and the means test can determine:
- Whether your repayment period will last three years or five years
- How much you must pay each month to fulfill the repayment plan
Can Bankruptcy Affect Other Retirement Accounts?
Funds and investments held in qualified retirement plans—those protected under the Employee Retirement Income Security Act of 1974 (ERISA)—are generally shielded from forfeiture in bankruptcy proceedings. These include many but not all 401(k) and 403(b) accounts, individual IRAs and Roth IRAs. However, the bankruptcy court may gain access to funds held in nonqualified retirement plans.
If total holdings in your (qualified or unqualified) retirement funds exceed a set exemption limit, any surplus could be subject to bankruptcy forfeiture. The exemption limit is currently $1,512,350; the limit gets a cost-of-living adjustment every three years, and the next scheduled update is due in 2025.
Note that retirement savings remain shielded from bankruptcy forfeiture only as long as they remain in shielded accounts. Once funds are withdrawn, the bankruptcy court may consider the assets subject to forfeiture. Any income streams that flow from pension or retirement accounts must be documented in the bankruptcy means test and may be tapped for a Chapter 13 repayment plan.
The Bottom Line
Filing for bankruptcy has no direct impact on your Social Security eligibility or the amount or frequency of your benefit payments, but Social Security income can play a role in deciding whether you qualify for Chapter 7 or Chapter 13 bankruptcy and can influence Chapter 13 repayment plans. If you are receiving Social Security benefits and considering a bankruptcy filing, it may be wise to consult a bankruptcy attorney or financial adviser for guidance on how to protect as many of your assets as possible.
