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Understanding the Impact of Bankruptcy on Social Security and Retirement Accounts

Filing for bankruptcy can be a complex process, especially when considering how it might affect your Social Security payments and retirement accounts. At O1ne Mortgage, we are here to help you navigate these challenges. For any mortgage-related needs, feel free to call us at 213-732-3074.

Can Bankruptcy Affect Your Social Security Payments?

Filing for bankruptcy does not impact your eligibility for Social Security benefits or the amount you receive. However, Social Security payments can influence bankruptcy proceedings. If you are receiving Social Security benefits when you file for bankruptcy, the court may consider these payments when assessing your ability to repay creditors. Mixing Social Security funds with other money in the same account could put those funds at risk of forfeiture to pay your debts.

How Is Social Security Income Considered in Bankruptcy?

Social Security income is generally exempt from forfeiture in bankruptcy, meaning the court cannot garnish these benefits to repay your debts. However, you will need to document your Social Security benefits, along with other income sources and monthly expenses, by submitting the required means test.

Chapter 7 Bankruptcy

The means test determines eligibility for Chapter 7 bankruptcy, which can discharge many forms of debt after forfeiting certain assets to repay creditors. If your income exceeds the median for a household of your size in your state, you may not qualify for Chapter 7. Mixing Social Security benefits with other funds in a single account could make them subject to forfeiture. Keeping Social Security funds in a dedicated account can help prevent this.

Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, a repayment plan is created to provide full or partial repayment to creditors. The means test will determine the duration of your repayment period (three or five years) and the monthly payment amount. Social Security income must be documented and may be used in the repayment plan.

Can Bankruptcy Affect Other Retirement Accounts?

Funds in qualified retirement plans, such as many 401(k) and 403(b) accounts, IRAs, and Roth IRAs, are generally protected from forfeiture in bankruptcy under the Employee Retirement Income Security Act of 1974 (ERISA). However, nonqualified retirement plans may not be shielded. If your total retirement holdings exceed the exemption limit, any surplus could be subject to forfeiture. The current exemption limit is $1,512,350, with adjustments for cost-of-living every three years.

Retirement savings remain protected as long as they stay in shielded accounts. Once withdrawn, these funds may be considered for forfeiture. Income streams from pension or retirement accounts must be documented in the bankruptcy means test and may be used in a Chapter 13 repayment plan.

The Bottom Line

While filing for bankruptcy does not directly affect your Social Security eligibility or benefit amounts, Social Security income can influence your qualification for Chapter 7 or Chapter 13 bankruptcy and repayment plans. If you are receiving Social Security benefits and considering bankruptcy, consulting a bankruptcy attorney or financial adviser is advisable to protect your assets.

For any mortgage-related needs, O1ne Mortgage is here to assist you. Call us at 213-732-3074 for expert guidance and support.

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