Keeping Social Security Disability Settlements in Chapter 7 Bankruptcy

SSD Settlements: Right To Receive a Payment vs. Already Received the Payment

social security disability settlements in chapter 7 bankruptcy

Protecting the Right to Receive Social Security Disability Settlements in Chapter 7 Bankruptcy

If you have applied for Social Security Disability benefits and have not yet received an award or payment, the right to receive a lump sum or other Social Security Disability payment is protected in a Chapter 7 bankruptcy. A Chapter 7 bankruptcy is a "liquidation" bankruptcy, in which a "bankruptcy estate" containing all of a filer's personal assets is created by function of law the moment the bankruptcy petition is filed with the Eastern District of Michigan US Bankruptcy Court. The right to receive payment of a debt owed or in payment for a claim is typically property of the bankruptcy estate---and all property of the bankruptcy estate is subject to the liquidation power of the Chapter 7 Bankruptcy Trustee, the individual assigned to your case by the US Bankruptcy Court to liquidate personal assets where he or she is able in order to distribute the resulting sale proceeds to the creditors of the filing individual whose debts will otherwise be totally discharged by the bankruptcy itself. Both the US Bankruptcy Code (the statute governing the Federal bankruptcy process) and other Federal statutes, however, protect a Social Security Disability or other Social Security claim in a couple of different ways. One, an exemption is provided which will fully and with no upper dollar-limit cap exempt lost future wages. (An "exemption" is what an experienced bankruptcy attorney applies to an asset to exempt or remove it from the bankruptcy estate so that the Trustee has no power to liquidate it.) Social Security benefits expected of this sort are certainly classifiable as lost future wages. Additionally, non-bankruptcy Federal provides that the right to receive such a payment or benefit is non-transferable---meaning that it is not a right that can be sold or transferred. That being the case, a number of Bankruptcy Courts have held that the right to receive a Social Security Disability payment is not something that ever enters the bankruptcy estate to begin with.

Protecting Social Security Disability Settlements in Chapter 7 Bankruptcy When You've Already Received the Money

The picture can become complicated, however, when the payment has already been received, when it is in actual cash form and is no longer simply a "right to receive a payment." In this case, it may still be protected---but a filing debtor must be prepared to document with bank statements, deposit forms, and anything else where that large amount of money in a bank account actually came from in order to keep it safe---and you should file the Chapter 7 only with the assumption in mind that you will have a discussion of one sort or another about the exemption and protection of the funds with your Chapter 7 Trustee if you have already received the funds. That "discussion" may take place within the framework of litigation. The judicial decisions of bankruptcy judges regarding the protected nature of payments already received vs. payments expected have varied, and the case-law on the protection of such funds already received is divided. The extent to which you will encounter difficulty protecting received funds from attempts by Chapter 7 Trustees to object to any exemption protecting the funds will differ depending upon which jurisdiction your Chapter 7 bankruptcy is filed in. The presumption that such funds are automatically protected is a primary reason why an experienced bankruptcy attorney should be consulted before deciding to file a Chapter 7 without an attorney. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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