Social Security Benefits Protected In Bankruptcy

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A federal appeals court ruled creditors can't demand Social Security benefits be used to repay debts in Chapter 13 bankruptcy.

Should your creditors be able to seize your Social Security payments to satisfy debts in a chapter 13 bankruptcy?

The National Association of Consumer Bankruptcy Attorneys says no, and an appeals court recently agreed. From their press release:

In re Welsh, the Ninth Circuit Court of Appeals shielded Social Security benefits from creditors. NACBA, represented by the National Consumer Bankruptcy Rights Center, had filed an amicus curiae brief asking the court to honor the clear directive of Congress that these benefits, vital to so many elderly and disabled individuals, be protected from creditors and chapter 13 trustees eager to squeeze every last cent out of debtors who have suffered financial hardships.

NACBA President Ed Boltz said: “We are gratified that the court recognized that Congress wanted to protect these benefits from creditors, as it has done historically since the Social Security Act was passed.”

The case in question involved a 2010 Chapter 13 bankruptcy filing. Montana residents David and Sharon Welsh owed more on their home, trailer, two ATVs, and two of their three cars than those things were worth. They also owed over $180,000 on other things, including about $60,000 from a daughter’s student loans and$50,000 on a Bank of America line-of-credit.

Dave was retired and drawing Social Security, while Sharon was a nurse making about $7,000 a month. Based on that income, they planned to repay $125 a month on the unsecured debts (the $180,000 of “other things”) for the first two-and-a-half years and then $500 a month after paying off the vehicles.

The creditors’ representative argued that wasn’t good enough, saying they were making tiny payments that didn’t include the Social Security income, “while they were living in a $400,000 home, making payments on various luxury and unnecessary items and failing to commit one hundred percent of their disposable income to the plan.”

Whatever you might think of their spending habits, the court has repeatedly sided with the Welshes and NACBA, and just did again. You can dig into the details of the ruling here. [PDF]

Stacy Johnson

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