A serious injury or medical condition can affect more than just a person’s health. For many people, it can also create significant financial strain. Individuals who apply for or receive Social Security Disability benefits may struggle to keep up with everyday expenses, especially if they were unable to work for months while their claim was being processed. It makes sense that many are left asking, “Can I file bankruptcy while on disability?”
While it is rarely an ideal solution, filing for bankruptcy can sometimes provide relief by eliminating certain debts or offering a manageable repayment plan. For those waiting months, or even years, for their SSDI benefits to be approved, financial pressure can build quickly.
In this article, we discuss how filing for bankruptcy may affect your disability benefits, what to expect when you file, and how to protect your benefits from creditors.
Don’t face Social Security alone.
Can you file bankruptcy while on disability? In this article, we discuss:
Key Takeaways
- You can file bankruptcy while on disability. Receiving SSDI, SSI, or VA disability benefits does not prevent you from filing for bankruptcy, and filing will not put an end to your benefits if you remain eligible.
- Disability benefits are usually protected in bankruptcy under federal law. Generally, Social Security and VA disability payments are protected from creditors, although certain debts like child support or back taxes may still allow garnishment.
- Disability income must be reported in bankruptcy. While Social Security benefits typically don’t count toward the means test for Chapter 7, they must be listed on required forms and could influence repayment plans in Chapter 13 cases.
Can you file for bankruptcy while on disability?
You can file for bankruptcy while on disability, and doing so won’t put an end to those benefits. Monthly Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI), and VA disability benefits are all protected under federal law and cannot be taken away if you file for bankruptcy.
As long as you remain eligible for disability benefits, you should continue receiving them during and after your bankruptcy case. However, certain government debts, such as back taxes, child support, or debts with the Social Security Administration (SSA), may still allow garnishments in some situations. But this is the case regardless of whether or not you file for bankruptcy.
Do you need to report disability income when you file for bankruptcy?
Before getting into how disability income is reported, it helps to understand the two most common types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy focuses on eliminating certain debts, while Chapter 13 allows you to repay some or all of your debts through a structured repayment plan. The type of bankruptcy you file can affect how your income is evaluated and what forms you must complete.
With that in mind, below we explain how to report disability income when you file for bankruptcy.
There are a number of forms you must fill out when you file for bankruptcy. You must disclose your disability income on two of these forms that ask about your finances and income: the means test and Schedule I (form 1061).
For the means test, you are required to list your Social Security disability income. However, it doesn’t count toward your final monthly income calculation used to determine whether you qualify for Chapter 7 bankruptcy. Because of this, SSDI benefits generally would not affect your eligibility for Chapter 7 nor your repayment plan for Chapter 13.
On the Schedule I form, you must report your SSDI and VA disability income, if applicable. However, unlike the means test, disability income does count toward your total monthly income. The bankruptcy court uses this information to understand your financial situation and determine whether you can cover your living expenses.
This information may also help the court determine:
- In Chapter 7 bankruptcy, if you can afford to keep your secured debts, such as a car loan
- In Chapter 13 bankruptcy, how much you can realistically pay into your repayment plan every month
If there are any deductions taken from your disability benefits, such as taxes or insurance, you would also need to include those on the Schedule I form.
Can you protect disability benefits from creditors?
In most cases, disability benefits are protected from creditors during bankruptcy. However, the specific protections available depend on the exemptions allowed in your state.
Exemptions are laws that protect certain income and property from being taken by creditors or the bankruptcy trustee during a bankruptcy case. Both federal law and individual states provide exemption options.
If you have disability income in the same bank account as money from other sources, you may need to rely on a federal or state exemption to keep those funds protected.
Many people choose to keep their disability benefits in a separate bank account used only for Social Security deposits. Doing so can make it easier to show the funds came from protected benefits and therefore prevent them from being combined with other, non-exempt income.
If you receive a lump-sum disability payment for back benefits, those funds may not be protected. In some cases, you may need to claim an exemption to protect that money during bankruptcy.
What happens to Social Security debts during bankruptcy?
If someone who receives SSDI owes money to the SSA because of an overpayment, for example, filing for bankruptcy may temporarily stop collection efforts.
When a bankruptcy case is filed, an automatic stay usually goes into effect. This legal protection prevents most creditors, including the SSA, from continuing collection actions while the bankruptcy case is pending. This means that creditors, including the SSA, cannot:
- Call you about unpaid debts
- Send collection letters
- File lawsuits or continue any existing lawsuits
- Garnish wages or bank accounts
The automatic stay can provide immediate relief for many people who struggle with overwhelming debt. However, other financial obligations, such as child support, alimony, or certain tax debts, may still be collected even during bankruptcy.
In some situations, the debt may be discharged through bankruptcy, meaning the person is no longer legally required to repay it. However, not all debts are automatically wiped out. If the debt is not discharged, the SSA may still try to collect it later.
How Woods & Woods can help
Having a disability shouldn’t mean losing your peace of mind. At Woods & Woods, we help individuals with disabilities connect with legal help. If you’re seeking SSDI benefits, call us today for a free case evaluation.
Claim what you worked for.
Frequently asked questions
Yes, you can file for bankruptcy while on disability. Receiving SSDI, SSI, or VA disability benefits does not prevent you from filing, and doing so will not put an end to your benefits.
Disability income must be reported when filing for bankruptcy, but Social Security disability benefits are not counted in the means test used to qualify for Chapter 7. However, disability income may still be considered when determining payments in a Chapter 13 repayment plan.
Lori Underwood
Lori Underwood received her law degree from Northern Kentucky University. She previously practiced Social Security disability and personal injury law and was a juvenile court attorney.
She has been an attorney at
Woods & Woods since 2014.
