Bankruptcy – Should Someone on Social Security File?

As a general rule, filing bankruptcy is not the best option for a person whose single source of income is social security.  As with any general rule, there are exceptions.  Section 207 of the Social Security Act (42 U.S.C. 407) protects Social Security benefits from being garnished by ordinary creditors. Why would you want to file bankruptcy if your creditors can’t touch your income?

While benefits are protected in most cases, there are four exceptions to this law.

1.  Social Security benefits can be garnished to collect child support or alimony.

2.  Social Security benefits can be garnished to collect unpaid federal taxes.  The IRS can garnish up to 15 percent on your monthly benefit.

3.  Recipients of Social Security benefits can elect to have their benefits garnished by the IRS to cover future tax liability.

4.  Other Federal agencies can garnish your social security to collect on a debt owed to that Federal agency.

Click here to go the Social Security website for more detail on the exceptions.

I get calls every week from people in Dallas, Hiram, Douglasville, Dalton, Rome and Cartersville who are on social security and who think Chapter 13 bankruptcy will lower their future mortgage payments.  The truth is that unless you owe less than five years on your mortgage, Chapter 13 bankruptcy won’t have any effect on your future mortgage obligations in Northwest Georgia.  In most cases where social security is the only source of income, Chapter 13 won’t help because any creditor that could be wiped out in a Chapter 13 bankruptcy case also would not be able to garnish the social security benefits.

One scenario where a Chapter 13 may help someone who is on social security is when they own a house or other asset that has no debt.  In this situation, it might be possible to write a Chapter 13 plan that will protect the asset.

Another reason many people on Social Security want to file bankruptcy is to get rid of the nasty creditor calls.  I can certainly understand why a person would want to get out from under this kind of pressure.  In most Social Security situations I’ve seen, it is often best for the client to just get a new unlisted phone number and save themselves from the cost of bankruptcy.

Other Posts:

1. What is Chapter 13?

2. What is Chapter 7?

3. How much does it cost to file?

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