Bankruptcy When Your Income Is Public Benefits

How does bankruptcy work when public benefits are your only income?

Three parts of the Bankruptcy Code do most of the work here. Section 109(a) describes who may be a debtor in terms of residing or having a domicile, a place of business, or property in the United States. It says nothing about earning wages. Filing then creates an estate made up of all your legal or equitable interests in property (11 U.S.C. § 541(a)(1)), and 11 U.S.C. § 522 lets an individual debtor exempt property back out of that estate. For public benefits, a fourth provision sits outside the Code entirely: 42 U.S.C. § 407(a) states that the right to a future payment under that subchapter is not transferable or assignable, and that the money is not subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law. So the question is rarely whether a benefit recipient can file. It is how the money is described, listed and claimed.

What changes the answer in your situation?

Four things move this more than anything else. First, which program the money comes from. 42 U.S.C. § 407 is written in terms of payments 'under this subchapter', so whether it reaches a particular program is a question for a lawyer rather than something to assume from the name of the benefit. Second, whether the money is still identifiable. Several state statutes exempt benefits only 'so long as they are not mingled with other funds of the recipient' (Ark. Code Ann. § 11-10-109; RCW 50.40.020). Third, which exemption list your state allows. Some states permit only state-law exemptions plus federal exemptions other than 11 U.S.C. § 522(d) (Ala. Code § 6-10-11). Fourth, where you have lived, because 11 U.S.C. § 522(b)(3)(A) points to the place your domicile has been located for the 730 days immediately preceding the filing.

• Which benefit program the payment comes from
• Whether the money is still separate from other funds
• Whether your state allows the federal exemption list
• Where your domicile has been for the past 730 days

What does federal law say about benefits in bankruptcy?

42 U.S.C. § 407(a) provides that the right to any future payment under that subchapter is not transferable or assignable, and that none of the money paid or payable is subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law. Subsection (b) adds that no other provision of law may be construed to limit, supersede, or otherwise modify that section except to the extent it does so by express reference. Inside the Bankruptcy Code, 11 U.S.C. § 522(b)(3)(A) lets a debtor claim property exempt under federal law other than § 522(d), or under the state or local law of the debtor's domicile. The means test starts from current monthly income, described on Official Form 122A-1 as average monthly income from all sources during the 6 full months before filing (11 U.S.C. § 101(10A)). The District of Arizona's chapter-choice guide states that benefits received under the Social Security Act are excluded from that figure.

Where do state rules differ?

State law does a large share of the work, in two different ways. Some states limit which exemption list a debtor may use at all, and some have their own statutes saying that a particular benefit is beyond the reach of creditors. New York, for example, names the debtor's right to receive a social security benefit, unemployment compensation, a local public assistance benefit, a veterans' benefit, and a disability, illness or unemployment benefit. Many unemployment statutes exempt benefits from remedies for the collection of debt, then carve out narrow exceptions such as child support or debts for necessaries furnished while the person was unemployed. Because the amounts, the carve-outs and the opt-out choice are all state-specific, check the exemption page for your state rather than generalising from another one. The examples below are illustrations, not a substitute for your state's own list.

What does this look like in practice?

Say your only income is a monthly disability deposit, and a creditor with a judgment has started collecting against your account. Filing operates as a stay of most acts to collect a claim that arose before the case (11 U.S.C. § 362(a)(6)) and of enforcement of a judgment obtained before the case (§ 362(a)(2)), which commonly halts that kind of collection while the stay is in effect. On the paperwork, the deposit is still disclosed as income and the account balance is still listed as property, with an exemption claimed against it. If Social Security Act benefits are excluded from current monthly income, the number being compared to your state median can be very small, and the official form instructions state that the second Chapter 7 means-test form is not required when income is not above the median. For Chapter 13, 11 U.S.C. § 101(30) defines an individual with regular income by whether income is 'sufficiently stable and regular' to fund a plan, not by where it comes from.

What documents, information and costs are involved?

Expect three categories of paperwork. Income statements: Official Form 122A-1 reports current monthly income, and the Southern District of Indiana's procedure states it must be filed with the petition or within 14 days of filing. Schedules: Schedule I reports your income, and Schedule C is where exemptions are claimed. The official instructions are blunt that exemptions are not automatic and that unlisted property may be sold by the trustee. Proof of income: local rules commonly require documentation of what you actually received. The District of Montana, for example, requires payment advices and proof of income from all other sources for the 60 days ending on the last day of the month before filing, filed at least 14 days before the meeting of creditors. Benefit award letters and deposit records usually fill that role when there are no pay stubs. Court fees are set nationally.

What should you ask a lawyer?

Benefit income raises questions that are answered state by state and district by district, and a clerk's office cannot answer them for you. The most useful questions are narrow and about your own facts rather than about the law in general. Bring your award letter, recent account statements, and any collection paperwork you have received, because most of these questions turn on documents rather than on argument. A local bankruptcy lawyer or a legal aid office can also tell you how the trustees in your district usually handle benefit deposits, which is practical information that no statute contains. If cost is the obstacle, ask about fee waivers, installments, and whether a legal aid clinic in your district takes consumer bankruptcy cases.

• Does my state allow the federal exemption list, or only state-law exemptions?
• Which of my benefits does my state's exemption statute name specifically?
• How should I keep benefit deposits separate so they stay identifiable?
• How does this district treat benefit income in a Chapter 13 plan, given 11 U.S.C. § 1322(a)(1) and 42 U.S.C. § 407?
• What happens if an agency claims I was overpaid a benefit?

Frequently asked questions

Does Social Security count in the bankruptcy means test?

The means test starts from current monthly income, described on Official Form 122A-1 as average monthly income from all sources during the 6 full months before filing (11 U.S.C. § 101(10A)). The District of Arizona's chapter-choice guide states that benefits received under the Social Security Act are excluded from that figure. Excluded from the means-test calculation is not the same as hidden from the court: the income is still disclosed on the schedules.

Can I file bankruptcy if disability benefits are my only income?

Who may be a debtor is defined by residing or having a domicile, a place of business, or property in the United States (11 U.S.C. § 109(a)), not by holding a job. For Chapter 13, the Code defines an individual with regular income by whether income is 'sufficiently stable and regular' to make plan payments (11 U.S.C. § 101(30)), and such plans usually run three to five years. How a specific benefit interacts with a plan is a question for a lawyer.

Does filing affect SNAP, Medicaid or other public benefits?

11 U.S.C. § 525(a) bars a governmental unit from denying, revoking, suspending, refusing to renew, or discriminating with respect to a license, permit, charter, franchise, or other similar grant solely because a person is or has been a debtor. Whether a particular assistance program falls inside that language is not something we publish a verified answer on for every program. Ask the agency that administers the benefit, and a lawyer, before assuming either way.

What happens to benefits already sitting in my bank account?

This is where most problems start. Several state statutes exempt benefits only so long as they are not mingled with other funds of the recipient (Ark. Code Ann. § 11-10-109; A.R.S. § 23-783; RCW 50.40.020). A benefit deposit sitting alongside a tax refund or a gift can be harder to identify. The official instructions also state that exemptions are not automatic: the property has to be listed on Schedule C to be claimed.

Is there any way to file if I cannot afford the court fee?

There are two routes, and they differ by chapter. The Chapter 7 fee waiver is conditional under 28 U.S.C. § 1930(a)(1)(A), (f)(1) and Judiciary procedures, so it is applied for rather than assumed. For Chapter 13, the statute permits installment payment for an individual commencing a voluntary or joint case, and the statutory Chapter 7 waiver does not apply there. The clerk's office can tell you which application form your court uses.

Are veterans' benefits treated differently?

In two visible ways. Official bankruptcy form instructions direct servicemembers, veterans and family members of veterans to a Department of Justice list of benefits that need not be reported on lines 9 or 10 of Form 122A-1 on account of a veteran's death or disability, under the HAVEN Act of 2019. Separately, some state exemption statutes name a veterans' benefit outright, as N.Y. Debt. & Cred. Law § 282 does.

Sources

• 42 U.S.C. § 407 — Assignment of benefits
• 11 U.S.C. § 109 — Who may be a debtor · official source
• 11 U.S.C. § 101 — Definitions · official source
• 11 U.S.C. § 522 — Exemptions · official source
• 11 U.S.C. § 541 — Property of the estate · official source
• 11 U.S.C. § 362 — Automatic stay · official source
• 11 U.S.C. § 525 — Protection against discriminatory treatment · official source
• 11 U.S.C. § 1322 — Contents of plan · official source
• N.Y. Debt. & Cred. Law § 282 — Permissible exemptions in bankruptcy
• Ala. Code § 6-10-11 — Exemptions in federal bankruptcy
• A.R.S. § 23-783 — Assignment or pledge of benefits void; exemption from attachment or execution
• Ark. Code Ann. § 11-10-109 — Protection of rights and benefits
• RCW 50.40.020 — Exemption of benefits
• RCW 74.08.210 — Grants not assignable nor subject to execution
• Tex. Hum. Res. Code § 31.040 — Nontransferability of assistance funds
• Mont. LBR 4002-6 — Filing of income documentation for 60 days before bankruptcy
• U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter: What can Bankruptcy do for you? What will it do to you?
• Bankr. S.D. Iowa official guidance — Instructions - Bankruptcy Forms for Individuals
• U.S. Bankr. Ct. D. Alaska, The Forms Individuals and Married Couples Need to File Bankruptcy
• Bankr. S.D. Ind. official page — Chapter 7 Statement of Current Monthly Income
• Bankruptcy Administrator for the Eastern District of North Carolina, Chapter 13
• 28 U.S.C. § 1930(a)(1)(A), (f)(1) · official source
• 28 U.S.C. § 1930(a)(1)(B) · official source
• Bankruptcy Court Miscellaneous Fee Schedule, Item 8
• Bankruptcy Court Miscellaneous Fee Schedule, Item 9

Related

• Build your personalised roadmap
• The 730-day domicile rule: which state's exemptions apply
• The 341 meeting of creditors: what actually happens
• 11 U.S.C. § 101 — Definitions
• Find your local bankruptcy court
• Find a bankruptcy lawyer by state