When you file for bankruptcy, you receive protection from creditors, and if your case ends successfully, you also receive a bankruptcy discharge. In addition to its benefits, bankruptcy also means losing a great deal of privacy and control over your assets. During a bankruptcy, the trustee potentially could sell everything from the clothes on your back to the vehicle you drove to court.
According to SSA.gov, Social Social Security disability benefits are payments made to individuals whose health conditions prohibit them from working and are expected to keep them from working for no less than one year. The Social Security Administration has tables outlining how long you must have worked prior to becoming disabled to qualify for benefits. After applying for benefits, it can take several months to learn whether you have been approved or denied. Some individuals qualify for back pay, or retroactive benefits.
As a general rule, the bankruptcy trustee may not take your Social Security disability back pay. Soon after you filed bankruptcy, the bankruptcy court appointed a trustee to administer the bankruptcy estate. The trustee's role includes surveying the case for fraudulent activity and identifying assets that she can liquidate for the benefit of your unsecured creditors. The bankruptcy estate is composed of all your assets. Some assets, however, are exempt from the trustee's reach.
Social Security benefits are exempt assets. Exempt, for bankruptcy purposes, means the trustee cannot take the asset away. Federal bankruptcy law establishes various exemptions; however, federal law gives the states the option to opt out of federal law exemptions and apply their own. Across the board, however, both federal and state law exempt Social Security benefits.
Social Security benefits can lose their exempt status if you're not careful. One way to make Social Security benefits vulnerable to the trustee is to commingle them with nonexempt funds, because doing so can make the two difficult to distinguish. If, for instance, you keep your gambling winnings, paycheck and Social Security benefits in your checking account, it may become difficult to determine which dollar came from which source. Another way to jeopardize the benefits is to use them to make a permanent investment. For example, if you use the benefits to purchase a car, the trustee may potentially take the car in spite of the fact you used your Social Security benefits to purchase it.