How Disability Benefits Are Treated in a Bankruptcy Case

If you are considering filing for bankruptcy and are on disability, you may be concerned about how the case will affect the benefits you are receiving. Although they are deemed assets under bankruptcy law, disability benefits are generally protected from creditors by being covered by state and/or federal exemptions. However, having these benefits as part of your income and assets may still have an impact on your bankruptcy case.

The first question that must be addressed in filing for bankruptcy is which type of bankruptcy you’re eligible for. To file a Chapter 7, which is a straight discharge of most or all debts, you usually have to pass the means test. This takes into account any income that might be available to be partially repay your debts. Whether disability benefits are included in calculating that income depends on their source. The calculation excludes federal disability benefits, namely Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI) and Veterans Administration (VA) disability income. However, benefits from private and state sources may have to be factored in. Your total monthly disposable income cannot exceed the Georgia median income for households of your size.

If you qualify for Chapter 7 bankruptcy, also known as a liquidation, you can exempt a large amount of your property from being sold off to pay creditors. In Georgia, you can only use the bankruptcy exemptions provided by state law. But federal non-bankruptcy exemptions for SSDI, SSI or VA benefits may be used, which means you can keep these funds as they roll in.

A common question is whether benefits received as lump sums prior to filing for bankruptcy can be exempted as well. The answer is yes, but you will have to prove the sources of the amounts you are claiming to be exempt. This can be done by showing bank or investment account records and matching them with benefits statements. If the disability funds were used to make purchases, that property might also be exempt as long as the source of funds can be verified.

If your income level is too high to qualify for Chapter 7, you can pursue a Chapter 13 bankruptcy, which is a restructuring and repayment of your debt over a period of three or five years. Part of determining your monthly repayment amount is factoring in the amount of your disposable income. For this purpose, disability income from government sources is not considered but income from state and private sources is. This effectively means that some of your benefits may be devoted to repaying creditors.

Jeff Field & Associates in Scottdale, Georgia helps individuals throughout the Atlanta metropolitan area obtain debt relief through bankruptcy. We have offices in Scottdale, Gainesville, Marietta, Lawrenceville, Douglasville and Athens. To schedule a personal consultation, please call 404-381-1278 or contact us online.