The answer is: “Usually, neither.” In most cases, there is no effect on Social Security benefits and once in a while bankruptcy actually helps to protect the benefits that are due to you.
As a starting point, by law, a person’s Social Security benefits cannot be assigned to any other person or company. According to Section 207 of the Social Security Act, “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.”
This means, practically, that:
(1) most creditors would not have a right to go after Social Security benefits, even if they have a judgment against the person; and
(2) Social Security benefits are not considered a source of income that has to be used to make payments to creditors, if the person files a bankruptcy case.
So, if your only source of income is Social Security benefits, and you fall behind on the credit card bills and credit card companies get a judgment against you – they can’t try to go after your Social Security checks. If they tried to levy funds from your bank accounts, they would not succeed as long as you can prove the only source of the funds in the account is Social Security benefits, not commingled with any other funds. If you find yourself in this situation and are considering filing bankruptcy, it may not be necessarily worth it because your income is already judgment-proof. Potentially, you may still decide to file bankruptcy if you have real estate with equity or other assets of high value that creditors may be trying to reach, or even just for your own peace of mind to stop the collection calls and letters, but do know that most creditors would not have a right to take part of your Social Security checks.
Also, if you do file bankruptcy, your Social Security benefits will not be used in the court’s calculation of disposable income, which is available to make payments to creditors.
Now, I did say that “most” creditors would not have a right to go after Social Security benefits, so there are a couple of exceptions. The exceptions apply if you owe federal income tax or child support. The IRS and child support agencies can place a levy on Social Security benefits. Filing a bankruptcy case in that situation may help to resolve or rearrange the debt to avoid the levy – for example, some old income tax debts may be cleared by bankruptcy, and a court-approved payment plan in a Chapter 13 case may be used to repay child support arrears and any non-dischargeable taxes.
If you receive Social Security benefits and find yourself in a difficult financial situation, talk to an experienced bankruptcy attorney to discuss the extent to which filing bankruptcy would be helpful in your situation.