You’ve anticipated retirement for decades, but a mid-life medical crisis left you with debt that threatens to undermine your retirement plan. Your ace in the hole: Social Security income.
You file Chapter 13 bankruptcy to discharge unsecured debt, projecting a monthly income that does not include your anticipated Social Security income. Clouds of debt that threatened to tarnish your golden years can now be cleared away.
Bad faith, cries the bankruptcy trustee. The plain language of bankruptcy law says Social Security income (SSI) is exempt from reporting as disposable income, but the bankruptcy trustee asserts the SSI must be included in projections of future disposable income used to calculate Chapter 13 payment schedules. Failure to include SSI in those projections shows bad faith, the trustee asserts, and a bankruptcy court refuses to approve a proposed Chapter 13 plan.
Not so, a 10th Circuit federal Court of Appeals panel said this week. Social Security benefits are exempt from calculations of projected disposable income in Chapter 13 bankruptcy filings.
The court found authority in both bankruptcy law and Social Security law to support their conclusions. The federal Bankruptcy Code defines disposable income, but does not explicitly define “projected disposable income” as considered in forms used to calculate repayment schedules. Failure to accurately complete those forms can be considered bad faith under the terms of bankruptcy law.
“Projected disposable income” can sometimes be some amount other than that calculated by a strict a mechanical formula based on prior income, as the United States Supreme Court affirmed in an earlier case (Hamilton v. Lanning). Social Security income, though, is a different matter, the 10thCircuit panel concluded.
One reason is because adding “projected” to the phrase “disposable income” doesn’t erase exemptions Congress included in the definition of disposable income, the 10th Circuit decision states. As to the question of bad faith, a Chapter 13 filer who asserts SSI exemptions allowed by law wasn’t acting in bad faith, the court found.
Further, even if Congress hadn’t protected Social Security income when it hammered out the bankruptcy code, it clearly carved out protections in Social Security law. Section 207 of the Social Security Act states that “none of the moneys paid or payable or rights existing under this sub-chapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.”
This week’s appellate ruling addressed only anticipated SSI income, but the plain language of Social Security law also protects lump-sum awards already in hand when a person files bankruptcy. Congress has created exemptions that allow SSI to be attached for certain tax or child support debts, but for purposes of bankruptcy, SSI is exempt.
If you’ve received a lump-sum payment or ongoing SSI benefits and anticipate filing bankruptcy, you may need to show how much of your cash on hand resulted from Social Security payments. Because they’re exempt under bankruptcy law, it is essential to keep those funds in a separate account. Avoid commingling that income with any other money.
Bankruptcy law is a complex, constantly changing field. Do-it-yourself kits and online advice can leave you unaware of recent changes, and unprotected when a bankruptcy trustee or a bankruptcy court commits a reversible error that can cost you money. If you are facing insolvency and need immediate debt relief, contact a qualified Oklahoma bankruptcy attorney today.
For a free confidential consultation about your rights in bankruptcy court and the potential benefits of filing bankruptcy, contact the Dept Line Law Office at (405) 563-7888.