Older chapter 7 New York bankruptcy debtors almost always ask if cash from their Social Security incomes are exempt in bankruptcy. The general answer is yes, Social Security income is exempt in bankruptcy and won’t count towards means test totals. In other words, bankruptcy treats Social Security income as though it wasn’t there. The policy behind this is that requiring people to pay out their Social Security money to their creditors interferes with the purpose of the program. In fact, this exception is broad and also applies to other legal actions by creditors, except if they’re for recovering tax debts or child support.
But the “general answer” isn’t the only answer. There’s an important exception debtors need to be aware of: comingled funds.
When debtors mix their Social Security payments with money from other sources, then creditors, whether in bankruptcy or other procedures, are not hampered by the broad protection to Social Security payments. Importantly, it’s up to debtors to prove in their filings that they’re entitled to their protected assets.
So how likely is this to be a problem for debtors?
The two-word answer is “direct deposit.” Several years ago, the Social Security Administration stopped sending out paper checks to recipients, requiring them instead to receive them by direct deposit. Most recipients, not expecting to file bankruptcy or face creditors’ judgments in the future, simply link their Social Security payments to their primary demand accounts, which makes sense. Why open a separate bank account just for your Social Security?
Now the comingling problem should be clear. What should debtors do if they are thinking about filing bankruptcy in the future but they suspect their Social Security cash is comingled with money from other sources, e.g. a retirement account?
The main option is to create either a sub-account for the Social Security funds or a separate account entirely. Debtors can then spend down the money in the comingled account on necessities that won’t raise objections by trustees.
Alternatively, debtors can apply a cash or wild card exemption to their comingled accounts, which is better than nothing but not as good as getting the free Social Security exemption. (Click to read more about how New York State’s exemptions compare to the federal exemptions.)
It may seem unfair, tedious, or confusing for debtors to lose the protection to all of their Social Security money just because they comingled it with even a little money from other sources, but that’s the way the law works. At least it’s better than nothing.
If you are experiencing financial difficulties then talking to an experienced New York bankruptcy lawyer can help you strategize your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy lawyer Brooklyn NY Bruce Weiner for a free initial consultation.