Can Filing for Bankruptcy Impact Your Social Security Benefits?
In general, your Social Security benefits are not impacted by filing for bankruptcy. However, there are certain circumstances under which bankruptcy might have implications for your Social Security benefits.
This article will demystify the relationship between bankruptcy and Social Security, explaining the legal protections in place and the practical steps you can take to safeguard your funds.
Filing for Bankruptcy and Social Security Benefits
With personal bankruptcy filings on the rise—the U.S. recorded 517,308 total cases in 2024, a significant increase from the previous year—this question is more relevant than ever. [1]
By April 2025, over 73.9 million individuals (which accounts for more than 20% of the U.S. population) will be receiving benefits through at least one Social Security program. It’s useful to understand how bankruptcy affects Social Security benefits when navigating the filing process.
If you are worried about losing your primary source of income, filing for bankruptcy does not stop your Social Security benefits, and a bankruptcy trustee cannot take them from you. This protection is not a loophole or a matter of chance; it is firmly embedded in federal law.
Federal Law Ensures Robust Protection
The foundation of this protection is Section 207 of the Social Security Act. The law explicitly states that Social Security benefits are not subject to execution, levy, attachment, garnishment, or other legal processes. (42 U.S.C. § 407). This means that creditors cannot legally seize your monthly payments to satisfy a debt, and this protection extends into the bankruptcy process.
The federal government established this rule to ensure that these benefits, designed to cover basic living expenses, remain available to recipients for their intended purpose.
Why Social Security Benefits are Safeguarded
In the context of bankruptcy, your property is categorized as either “exempt” or “non-exempt.” Exempt assets are things you are legally allowed to keep, protected from creditors and the bankruptcy trustee. Non-exempt assets can potentially be sold (liquidated) to pay back your debts, particularly in a Chapter 7 bankruptcy.
Social Security benefits are unequivocally classified as exempt property under federal law. [2] It ensures that the income you rely on for food, housing, and healthcare is not considered part of the pool of assets available to creditors during your bankruptcy case.
How Social Security Benefits Are Treated in Chapter 7 Bankruptcy
While your right to receive ongoing Social Security benefits is secure, the treatment of funds that have already been paid to you and are sitting in a bank account can become more complex, especially in a Chapter 7 bankruptcy.
Chapter 7 bankruptcy, often called a “liquidation” bankruptcy, involves a court-appointed trustee who gathers and sells your non-exempt assets to pay your creditors. [3] Your Social Security income itself is exempt. However, the protection for funds already deposited into your bank account hinges on one critical factor: whether those funds have been co-mingled with other non-exempt money.
If you deposit your Social Security benefits into an account that also contains wages, gifts, or other income, the trustee may argue that the exempt funds have lost their protected status.
As the money is mixed, it becomes difficult to trace the source and prove which dollars are protected Social Security funds and which are not. In this scenario, a trustee could potentially claim the commingled funds as part of the bankruptcy estate, making them available to your creditors.
How Social Security Income Impacts Chapter 13 Bankruptcy
The situation is significantly different and generally less risky in a Chapter 13 bankruptcy. It is a reorganization, not a liquidation. Instead of selling your assets, you propose a repayment plan to pay back a portion of your debts over three to five years. [4] You get to keep your property, including the funds in your bank accounts.
Social Security income also plays a beneficial role in the Chapter 13 eligibility process. To determine your repayment plan amount, the court calculates your “disposable income.”
Under federal law, Social Security benefits are explicitly excluded from this calculation. It means your Social Security income is not counted as money that must be put toward your repayment plan.
This can make it easier to qualify for a Chapter 13 filing and may result in a more affordable monthly payment, allowing you to discharge your debt while still meeting your living expenses.
Safeguarding Your Social Security Funds in Bank Accounts
The single most important step you can take to protect your Social Security funds during bankruptcy is to manage how they are stored. Proactive banking habits are essential to ensure the federal protections that apply to your benefits are not accidentally compromised.
The Critical Risk of Co-Mingling Funds
Co-mingling of funds occurs when you mix your exempt Social Security funds with non-exempt money in the same bank account. Once mixed, it is challenging to prove to a bankruptcy trustee which portion of the balance is protected. It can put your accumulated savings at risk in a Chapter 7 filing.
The most effective way to prevent co-mingling is to maintain a dedicated bank account used exclusively for your Social Security deposits. Set up direct deposits of security benefits into this account and avoid mixing with other income. It creates a clear record, protecting your funds from trustees and creditors.
The "Two-Month Rule" and Other Federal Protections for Deposited Funds
Federal banking regulations offer an additional layer of protection against garnishment. If Social Security benefits are directly deposited into an account, banks are automatically required to protect an amount equal to two months of benefits from being frozen or seized by a creditor.
Then “two-month rule” provides a buffer, but relying solely on this is not as secure as maintaining a fully segregated account, which protects the entire balance, regardless of the amount. [5]
Preventing Creditor Garnishment, Levy, and Bank Account Freezes
If a creditor obtains a court judgment against you, they can attempt to garnish your bank account. If your account contains only traceable Social Security funds, the garnishment should be denied.
However, if the funds are co-mingled, a bank may freeze the entire account until the court determines which funds are exempt, cutting off your access to essential money.
"Judgment Proof" Status for Social Security Recipients
Many individuals whose only source of income is Social Security are considered “judgment proof.” It means that while a creditor can sue them and win a judgment, there are no non-exempt assets or income for the creditor to legally collect.
Even if you are judgment-proof, filing for bankruptcy can still be beneficial. It can discharge the underlying debt permanently and invoke the automatic stay, which legally stops all creditor harassment and collection calls. [6]
Specific Social Security Benefits: SSDI, SSI, and Disability Back Pay
The robust federal protections apply across different types of Social Security benefits, ensuring a consistent safety net for all recipients.
Social Security Disability Income (SSDI): Full Protection in Bankruptcy
Social Security Disability Insurance (SSDI) payments are treated identically to retirement benefits. They are fully exempt from the bankruptcy estate under federal law. Whether you receive monthly payments or have accumulated funds in a separate account, they are protected from creditors.
Supplemental Security Income (SSI): Needs-Based Benefits Remain Protected
Supplemental Security Income (SSI) is also fully protected in bankruptcy. As a needs-based program for low-income individuals who are aged, blind, or disabled, SSI funds are considered essential for basic survival and are shielded from the bankruptcy process.
Treatment of Disability Lump Sum Payments in Bankruptcy
It is common for disabled individuals approved for disability benefits to receive a large, lump-sum payment for back pay. These funds are also exempt under the Social Security Act.
However, due to the large amount, it is absolutely critical to deposit this payment into a segregated account. Co-mingling a large lump sum with other money creates a significant risk that a trustee could claim the funds are no longer traceable and therefore not exempt.
How Other Related Benefits (e.g., Medicare, State Supplementary Payments) are Affected
Filing for bankruptcy does not affect your eligibility for Medicare, as it is a health insurance program, not a liquid asset. State supplementary payments that augment federal SSI are also generally considered exempt, though it is wise to confirm with skilled bankruptcy attorneys, as state laws can add another layer of complexity.
Broader Financial Considerations for Social Security Recipients Filing Bankruptcy
Beyond protecting your benefits, filing for bankruptcy offers several other advantages that can help you achieve a fresh financial start.
Immediate Relief from Creditor Harassment and Collection Calls
Filing for bankruptcy triggers an “automatic stay,” immediately stopping all creditor collection activities, including calls, wage garnishments, lawsuits, and foreclosures, giving you immediate relief to manage your finances.
Impact on Future Social Security Eligibility and Benefit Amounts
To be perfectly clear: filing for bankruptcy has absolutely no impact on your future eligibility for Social Security or the calculation of your benefit amount. The decision to file is a private financial one and is not reported to the Social Security Administration or used against you in any way.
Rebuilding Credit and Achieving Long-Term Financial Stability Post-Bankruptcy
While bankruptcy temporarily lowers your credit score, it also wipes out debt, providing a clean slate. Many people find they can begin rebuilding their credit within a year or two by using secured credit cards and making on-time payments.
The goal of bankruptcy is to create a path toward long-term financial stability. With the right strategy, you can use the legal protections available to get relief from debt without sacrificing the benefits you depend on.
Reach out to bankruptcy attorney Richard West for a free consultation regarding safeguarding your Social Security benefits during the bankruptcy process.
Sources:
[1] Bankruptcy filings rise 14.2 percent. (2025b, February 4). United States Courts. https://www.uscourts.gov/data-news/judiciary-news/2025/02/04/bankruptcy-filings-rise-14-2-percent
[2] SSR 79-4: SECTIONS 207, 452(b), 459 and 462(f) (42 U.S.C. 407, 652(b), 659 and 662(f)) LEVY AND GARNISHMENT OF BENEFITS. (n.d.). Social Security. https://www.ssa.gov/OP_Home/rulings/oasi/41/SSR79-04-oasi-41.html
[3] Chapter 7 – Bankruptcy Basics. (n.d.-c). United States Courts. https://www.uscourts.gov/court-programs/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics
[4] Chapter 13 – Bankruptcy Basics. (n.d.). United States Courts. https://www.uscourts.gov/court-programs/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics
[5] SOLVABLE. (2021, December 9). A guide to state bank garnishment laws | SOLVABLE. https://www.solvable.com/tax-help/wage-garnishments/bank-garnishment-laws-by-state/
[6] Kenton, W. (2024a, March 15). Judgment proof: What it is, Examples in debt management. Investopedia. https://www.investopedia.com/terms/j/judgment-proof.asp
