Is Social Security “Income” in Bankruptcy?

Social Security benefits, both age benefits and disability benefits, are and also are NOT considered “income” within the bankruptcy process in a couple of different ways.

Income is considered in the bankruptcy process both as a measure of a debtor’s eligibility for Chapter 7 (as opposed to Chapter 13) bankruptcy and as a measure of the debtor’s ability to repay creditors some portion of the debt owed to them on monthly average basis.

The first measure is calculated within the framework of the so-called “means test,” about which I have written extensively on this blog, which is both the test for Chapter 7 eligibility and also, in a Chapter 13 context, the barometer of whether the debtor may file a 3-year payment plan or a 5-year payment plan and what the minimum amount the debtor must pay to certain creditors in a Chapter 13 payment plan must be.

For purposes of this means test, Social Security benefits have been specifically stated in the US Bankruptcy Code to be NOT calculable as “income.” In other words, in the means test, all of your income from every source for the past 6 months is calculated to produce an average income number—except for Social Security. Thus, a debtor whose income is primarily derived from Social Security is much more likely to be eligible for a Chapter 7 bankruptcy than a debtor whose income derives from employment or other sources.

The second measure of income, however—the ability to repay creditors—does calculate Social Security benefits as monthly income to be compared with monthly household expenses. In a Chapter 7, the purpose of this comparison is a determination of whether the debtor is filing a Chapter 7 bankruptcy petition in “good faith,” which is to say, whether the debtor actually does have enough money on a monthly to basis to pay his or her debts. In a Chapter 13, the difference between monthly income and monthly expenses is also the basis for calculating the Chapter 13 plan payment. In a Chapter 7, Social Security is, in Michigan, simply calculated as income for this purpose.

In some federal judicial circuits around the US (the Eighth Circuit in particular), Chapter 13 debtors are allowed to remove from inclusion in a Chapter 13 plan payment income derived from Social Security as a result of judicial decisions reached in those circuits. Here in the Detroit, Michigan area, we are in the Sixth Circuit, and the Sixth Circuit has not reached this conclusion as yet. (One of the only judicial decisions in Michigan–in the Western District on the other side of the state than the Eastern District within which Detroit and surrounding counties rest—on the subject reached a somewhat opposite conclusion, in fact, holding that the fact that the income was derived from Social Security was one of several factors only to be considered in assessing a debtor’s “good faith”.)

In short, Social Security is NOT income on one hand, but it is income on the other. Sound confusing? Bankruptcy is not for the faint of heart, and such distinctions are a key reason why an experienced bankruptcy attorney should always be used if pursuing the remedy of bankruptcy.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or to schedule a free, initial consultation.

One response to “Is Social Security “Income” in Bankruptcy?

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