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How Can Bankrupcty Impact Your Social Security?

When you are in financial trouble, bankruptcy can be powerful in settling your debt. If you currently receive Social Security benefits and want to file for bankruptcy, you need to be aware of some things specific to your circumstance. Although Social Security benefits are exempt to bankruptcy, there can be some instances in which your benefits can be impacted.

The following are some things you need to know regarding your Social Security benefits and filing for bankruptcy.

The Type of Bankruptcy You File

The first consideration as to how bankruptcy affects your benefits is the type of bankruptcy you file. Most people file either for Chapter 7 or Chapter 13 bankruptcy. The two types of bankruptcy affect you differently, and will have different impacts on your Social Security benefits as well.

Chapter 7 bankruptcy is ideal for those with too much unsecured debt. When you file for Chapter 7 bankruptcy, you have to report all income you have received for a specified amount of time before you apply. Your Social Security benefits received either after or before you file will not be affected and are not included as you report your income.

Unfortunately, you could lose the benefits if you combine your Social Security benefits with other income. Your benefits also can have an impact when determining whether or not you can pay your debt.

Chapter 13 bankruptcy lets you retain your assets as you repay your debt using a payment plan. Based on your circumstances, your repayment in either in partial increments or in full. The court includes your Social Security benefits when they determine how much you are able to repay at a time.

Your Social Security benefits will not be used to pay your debt. If you rely on your benefits for your daily expenses and it is your primary source of income, you may not qualify for Chapter 13 bankruptcy.

The Type of Social Security Payments You Receive

Another consideration is whether or not you receive a lump sum payment from Social Security. If you get a lump sum, your funds remain protected just as regular benefit payments are under the law. However, lump sums are affected just like regular payments when combined with other sources of income.

If your Social Security lump sum payment is deposited in an account with other money, it can be difficult to show where the various payments in the account came from, including your Social Security benefits. This could result in loss of protection of your Social Security benefits.

The issue is more likely to arise when the lump sum payment is large. This is because the lump sum payment is more attractive to a trustee. If you keep your money separate, the protection of your benefits is more likely.

To be on the safe side, always deposit your lump sum payments into a completely different bank account away from any other income you have.

When You Already Combined Your Money

If you have already mixed your benefit money with your other income, you can take some steps to make the situation better. If you have not filed for bankruptcy, you need to immediately open a separate account for your Social Security benefits.

Consider using the combined money in your regular account before you file for bankruptcy. This way, a trustee cannot get into your account and negotiate about the source of the money.

If you have begun the bankruptcy process, you may qualify for a wildcard exemption in the state of Wisconsin to protect certain property.

If you need assistance with your bankruptcy filing, please contact us at The Michelson Law Office. We look forward to helping you with the bankruptcy process. We will help ensure the bankruptcy is as smooth and easy as possible.