Do Social Security Benefits Count Towards Determining Whether You Qualify for Bankruptcy?

Until early 2020, Social Security benefits did not count towards a Debtor’s income when he filed for bankruptcy. Social Security benefits were excluded from the Debtor’s gross monthly income calculation. For example, if a Debtor’s monthly income consisted of $1000 per month in pension income, plus an additional $1500 per month in Social Security benefits, the Bankruptcy Court only counted the $1000 pension income towards determining whether the Debtor qualified for bankruptcy. The additional $1500 per month in Social Security income was excluded, even if the Debtor could afford to pay his creditors in full out of that Social Security income.

A recent opinion from the Eastern District Of Michigan, “In Re Meehean”, changed the whole equation. In Meehean, the Debtors, husband and wife, filed a joint Chapter 7 bankruptcy. Their sources of income consisted of Social Security benefits and pensions. Listing only their pensions, and excluding Social Security benefits, the Debtors qualified for Chapter 7 relief. The U.S. Trustee’s office challenged Debtors bankruptcy, arguing that even though Social Security benefits could be excluded under the Code, excluding such benefits was also an act of “bad faith” that violated a different section of the Bankruptcy Code.

The Bankruptcy Judge agreed with the U.S. Trustee and held that in the Meehean case, the monthly Social Security benefit received by the Debtors had to be included. Based on this ruling, the Debtors no longer qualified for Chapter 7 bankruptcy, and if they wanted to stay in bankruptcy, they would have to convert their case to Chapter 13.

In ruling against the debtors, the Bankruptcy Judge reasoned that it would be bad faith for the Meehean Debtors to exclude Social Security income from their monthly income calculation if that Social Security income could help pay off their creditors. The Judge looked at the Debtors living expenses to determine whether they were reasonable (he determined that they were). He then figured out how much disposable income there would be if the Social Security income was included. Finally, the Judge looked at how much debt the Debtors had at the time they filed for Bankruptcy. The Judge determined that the Debtors had enough disposable monthly income after reasonable living expenses to pay off all of their creditors in full in a Chapter 13 Plan over 40 months. As such, the Bankruptcy Judge concluded that it would be bad faith for the Debtors to be able to discharge their debt in a Chapter 7 filing when they could pay it off in full in a Chapter 13 Bankruptcy without suffering any hardship.

The Judge in Meehean reconciled the “Social Security is not disposable income” issue with the “bad faith” issue by opining that a bankruptcy Judge has to act as a gatekeeper and look at the facts of each individual case. In a case like Meehean, the debtors had Social Security income and pension income, both of which were stable. With these sources of income, they could pay back their creditors in a Chapter 13 bankruptcy without suffering any hardship. This is why he felt that it would be “bad faith” to allow the debtors to discharge their debt in Chapter 7.

However, if the debtors had Social Security income plus additional income that was not dependable, such as from a job that they would soon be retiring from due to age, then the Social Security income could be excluded and the debtors would qualify for Chapter 7 relief.

The upshot of the Meehean opinion is that Bankruptcy attorneys have to look at each individual case where the debtors have Social Security income. If any additional income debtors receive is not stable, such as from a temporary job, then the Social Security income can be excluded and the odds are that the debtors would qualify for Chapter 7 relief. If, on the other hand, the additional income is stable, such as a pension, then the Social Security income cannot be excluded, and the debtors might be forced into a Chapter 13 bankruptcy.

Call the Law Firm Of Joseph L. Grima & Associates P.C. at (313) 385-4076 so that we may explain how your Social Security benefits might impact your bankruptcy.