When you file a petition for bankruptcy, you are asking for court-ordered protection from creditors. A court-appointed trustee will take any assets the law does not exempt from seizure. These assets, which can include personal property, vehicles, cash and a portion of your wages, are taken to satisfy your outstanding debts. If you have received a lump-sum benefit from Social Security, it may be exempt from seizure, depending on how you handle the money.
Social Security Back Benefits
When you apply for Social Security disability benefits, you may be entitled to a lump-sum back benefit on approval of your claim. The agency pays back benefits effective up to 12 months before the date of your application; the exact date depends on when the agency establishes the "onset," or beginning date, of your disability. Many disability beneficiaries are entitled to sizable back-benefit awards because the approval process can take a long time -- in some cases, as long as two years or more.
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Social Security Exemption
By federal law, monthly Social Security benefits that you receive are exempt from seizure or garnishment, with exceptions for unpaid federal income taxes, student loans and back child support. If you file for bankruptcy, your Social Security benefits remain exempt from seizure by the court trustee, while all collection actions are put on hold by a court-ordered stay.
Separate Accounts
The bankruptcy trustee may seize a lump sum back benefit that you collect before filing for bankruptcy if you do not keep the money in a separate account. If Social Security deposits the money into a bank account that also holds other income, then the funds may be considered "commingled" if you or the trustee cannot identify the portion of the account that consists solely of the Social Security lump sum. The trustee may consider the money as non-exempt, after you apply certain exemptions allowed for cash or the "wildcard" exemption for property of your choosing. It is important to set up a separate and dedicated account for lump sum benefits, so they cannot be seized by a bankruptcy trustee.
Exemptions After Bankruptcy
While your Chapter 7 bankruptcy case is pending, all creditors are stayed from collection actions by federal law, but non-dischargeable debts will survive the bankruptcy. After the bankruptcy case closes, the IRS can levy a portion of your Social Security benefits -- whether or not they are in a separate account -- for back taxes, and the federal government can seek repayment of a federally backed loan. Social Security benefits are never exempt from a child-support order.