Category Archives: Disability and Bankruptcy

Can My Social Security Benefits Be Garnished or Levied From My Bank Account?

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The short answer is yes it is possible, but rare depending upon the circumstances. Your social security benefits are general exempted from garnishment and levy by normal creditors and possibly the state you live in. In California, the State of California does not levy on your social security benefits. Your creditors also cannot garnish your social security benefits or levy on your bank account that contains your social security benefits. A creditor can still sue you and obtain a judgment to enforce against you, but how will they enforce the judgment is the question.

The Internal Revenue Service Will and Can Absolutely Levy on Your Social Security Benefits

Please see 26 U.S.C. Section 6334(c) regarding property exempt from levy and the IRS’s ability to enforce unpaid taxes. Section 6334(c) provides reference to Section 207 of the Social Security Act. Section 207 provides: (a) The right of any person to any future payment under this title shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law. (b) No other provision of law, enacted before, on, or after the date of the enactment of this section, may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference to this section. (c) Nothing in this section shall be construed to prohibit withholding taxes from any benefit under this title, if such withholding is done pursuant to a request made in accordance with section 3402(p)(1) of the Internal Revenue Code of 1986 by the person entitled to such benefit or such person’s representative payee.

Section 3402(p)(1) more or less treats social security payments as payment made by an employer as wages, which can be garnished and levied on in a bank account. The path to garnishment or ability to levy by the Internal Revenue Services is a twisted one, but nonetheless, the IRS can garnish social security benefits and levy upon social security benefits held in a bank account under certain circumstances.

If Your Only Income is Social Security Benefits You are Generally Considered Judgment Proof

If you owe a debt that is unsecured, that means there is no collateral securing the repayment of the debt, a creditor will have to sue you in state court and obtain a judgment to force repayment of the debt incurred. If your only income is social security benefits and you do not own real property, a house or raw land, then the options to enforce the judgment are very limited. Thus, the term judgment proof is described for this situation. A creditor can obtain a judgment against you, but how can the judgment be enforced? If you seek the counsel of a bankruptcy attorney regarding your debts be sure to let them know your only income is from social security. This should come out during a standard consultation but you never know. Make sure they know.

Some People That are Judgment Proof Still Choose to File Bankruptcy and Discharge Their Eligible Debts

If you are behind on your payments to unsecured creditors you know that the phone calls start relatively quickly after missing a payment and the letters demanding payment start relatively quickly too. Every now and then we have a client come in with income that is only social security. We inform them that they are for the most part judgment proof as described above. Some choose to file bankruptcy and discharge their eligible unsecured debts and others do not. For most they just want to move on with life and not worry about debts hanging out there to worry about. Everyone is different though. It is truly up to you what you believe is right for you. Filing for bankruptcy protection should stop the harassing phone calls and letters in the mail. As soon as the bankruptcy case is filed the automatic stay becomes effective stopping any and all collection activity. Once you receive a discharge in your case your creditors are barred from attempting to collect on a discharge debt incurred prior to the date the bankruptcy case was filed. Every now and then a creditor attempts to collect a debt after discharge and they can be held in contempt of court and sanctioned for this impermissible behavior.

Will Receiving Disability Affect My Bankruptcy Case?

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There are many reasons why people may need to file for bankruptcy. One of the reasons people may need to file for bankruptcy is their inability to work due to a disability, either from the workplace or their own personal health issues. Workplace injuries are unexpected and may wreck havoc on many aspects of your life including your finances. Disabilities due to your personal health issues are also a huge contributor to people’s financial woes. It is not surprising that people suffering from a disability may need to file for bankruptcy. Will receiving disability payments, either from a private insurance company or from public benefits such as state disability or Social Security Disability affect your bankruptcy case?

Receiving Disability Payments

If you are receiving disability payments or received a lump sum disability payment the payments need to be protected in your bankruptcy estate. Make sure you communicate to your bankruptcy lawyer you are receiving disability. Luckily your disability payments received are protected in California, whether they are from a private or public entity. California exemptions protect disability payments in full so you do not have to worry about losing those payments if they are sitting in a bank account. It may be in your best interest to use separate bank accounts for disability payments so you do not have any commingling issues. Commingling your disability payments with other sources of income may result in you having a difficult time proving what funds came from what source. Tracing the source of the disability payments should be easy and simple.

Disability and If You Own Real Estate

If you are disabled you have the right to the highest exemption value if you have equity in your home. Yes, receiving disability will affect your bankruptcy. Real estate values are increase in most parts of California. After the last several years of depressed home values people in certain parts of California are seeing increases in their home values again. That is great news if you are in the process of selling your home, but what if you have no intention of selling your home and you need to file for bankruptcy? As a bankruptcy attorney I have seen many people that are stuck in a situation where they need to file for bankruptcy but have a lot of equity in their home.

When you file for bankruptcy all of your assets are included in the bankruptcy estate. Each state has exemptions to protect your assets. Exemptions allow people filing for bankruptcy to keep a lot of their assets and obtain the fresh start they are looking for. If you have more assets than what can be protected that is where you run into problems. If you file a Chapter 7 bankruptcy case, any unexempt assets are liquidated and the proceeds are given to your creditors in exchange for a discharge of your debts. In a Chapter 13 bankruptcy case, you need to pay the amount of the unexempt asset into a Chapter 13 plan. You are essentially buying back your unexempt assets.

What can these people do then if they have equity in their home? If they file for Chapter 7 bankruptcy protection the trustee may liquidate their homes to satisfy creditors. If they file for Chapter 13 bankruptcy protection they need to pay the amount that is not exempted in their Chapter 13 bankruptcy plan but they may not have the funds to do so because they are on limited disability income.

If you live in California, you own real estate that has a lot of equity and are receiving disability you can use the $175,000 homestead exemption if you are physically or mentally disabled and as a result of that disability you cannot engage in substantial gainful employment. See California Code of Civil Procedure Section 704.730(a)(3)(B). If a creditor objects to the use of the homestead exemption that party has the burden of proving the exemption was not accurately used. If the creditor can provide evidence that contradicts the use of the exemption, the burden will then be on you to provide proof that indicates the use of the exemption was proper. There is a rebuttable presumption that a person receiving disability insurance payments under Title II or supplemental security income payments under Title XVI of the Social Security Act satisfies the requirements to receive the homestead exemption. The determination of whether you qualify for the exemption (have a mental or physical disability and cannot engage in substantial gainful employment) may be different in each case.

What constitutes “substantial gainful employment”? In one California case, In re Rostler, 169 B.R. 408 (Bankr. C.D. Cal. 1994), the court held that to satisfy this element, the person filing for bankruptcy must have been 1) unable to perform meaningful mental or physical work-related activity 2) in a competitive or self-employed position that 3) normally results in pay or profit. The fact that you can get “any work” or part-time work may not rise to the level of substantial gainful employment.

There are a number of types of income that must be documented when filing for bankruptcy protection. Disability insurance or payments are no difference. So, will receiving disability payments effect my bankruptcy case is easily answered, the answer is yes, and in most instances in a positive way.