Social Security benefits were not part of Chapter 7 bankruptcy estate

In the case of In re Franklin, the U.S. bankruptcy court for the Central District of Illinois determined that Social Security benefits were not included in the debtor's Chapter 7 bankruptcy, including pre-bankruptcy benefits deposited by the debtor into a separate bank account created to segregate and hold the benefits.

Background and procedural history

In 2013, the debtor filed for bankruptcy relief under Chapter 7. The debtor was retired and had a monthly income totaling $4,091.09, consisting of $2,699.69 in pension income and $1,391.40 in Social Security benefits.

At least eight months before filing the bankruptcy petition, the debtor opened a savings account on the advice of counsel that was devoted exclusively for deposits of the debtor's Social Security payments in order to preserve their exempt status.

The debtor claimed the savings account balance as fully exempt under Illinois law and federal law. The bankruptcy trustee filed objections to the claimed exemption. The trustee conceded that federal law provides generally for exemption of Social Security benefits, including benefits sent to a debtor that are on deposit in a bank account. However, the trustee argued that because the debtor was hoarding the monthly benefits in the account on the advice of counsel, thus demonstrating that the debtor did not really need the funds. Under the circumstances, the trustee argued that court had the authority under principles of "equity" to limit the debtor's claim to an exemption in the Social Security benefits to only those amounts that were reasonably necessary to pay for the debtor's basic living expenses.

The bankruptcy court's ruling

The bankruptcy court stated that under federal law Congress has an express policy that Social Security benefits are to be protected from the claims of creditors. The courts cannot read an implied exception into the law.

The bankruptcy court noted that the federal exemption also applies in other debtor-creditor proceedings outside of bankruptcy. For example, the exemption can be interposed as a defense in garnishment proceedings.

The exemption is automatic and excludes completely all moneys that have been paid or are payable under the Social Security laws. Federal law completely exempts such payments and prohibits the forced inclusion of past and future Social Security proceeds in the bankruptcy estate.

The bankruptcy court decided that the debtor's right to receive future Social Security benefits and the proceeds traceable to benefits already paid to him in the savings account were not property of the bankruptcy estate. The debtor did not even need to claim the benefits in the account as exempt, because the exemption process applies only to property belonging to the bankruptcy estate.

The bankruptcy court also decided that any equitable exceptions created by the courts to limit exemptions under bankruptcy law were not applicable to the debtor's Social Security income.

Contact an attorney

Individuals seeking bankruptcy relief should consult the legal advice of competent attorney experienced in such matters to ensure the protection of their legal rights.