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How Is Social Security Income Treated in a Chapter 13 Bankruptcy?

Walletssn2A bankruptcy filing requires a debtor to make an extensive inventory of their assets, debts, and sources of income. In a Chapter 13 bankruptcy, the debtor must obtain the court’s approval for a plan to repay debts. In addition to employment and investment income, a debtor may receive income from government benefits such as Social Security. A federal court of appeals recently affirmed that a debtor may exclude Social Security income from the calculation of disposable income and still meet the good faith requirement of a Chapter 13 bankruptcy plan. In re Walsh, No. 12-60009, slip op. (9th Cir., Mar. 25, 2013).

The debtors in the Walsh case, a married couple, filed for Chapter 13 bankruptcy in May 2010. Among their assets listed for the court were a house valued at $400,000, but in which the debtors only had about $70,000 in equity; and multiple vehicles, only one of which had a value in excess of its indebtedness. They also listed over $180,000 in unsecured debt. Their total income was greater than the median for their state, so their disposable income calculation was based on the “means test” defined in 11 U.S.C. § 707(b)(2). They listed total monthly income of just over $8,000, including the wife’s employment and pension income, and the husband’s employment income. They did not, however, include the husband’s $1,165 monthly Social Security income. The debtors proposed a bankruptcy plan that would eventually pay $14,700 on their $180,500 debt. Walsh, slip op. at 4-5.

The trustee assigned to the case objected to their plan, alleging that they did not propose the plan in good faith as required by 11 U.S.C. § 1325(a)(3), in part because they failed to make use of all of their disposable income, including the husband’s Social Security income. Walsh, slip op. at 5. The bankruptcy court overruled the trustee’s objections and approved the plan. With regard to the Social Security income, the bankruptcy court noted that federal law protects Social Security payments from bankruptcy proceedings. Id. at 7, 42 U.S.C. § 407(a).

After the Bankruptcy Appeals Panel affirmed the bankruptcy court’s ruling, the trustee appealed to the Ninth Circuit Court of Appeals. The court affirmed the lower courts’ rulings on all of the disputed issues. It noted that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which went into effect in 2005, created the “means test,” a “rigid, mechanical” method of calculating disposable income. Walsh, slip op. at 24. The trustee, the court noted, acknowledged that Social Security income was properly omitted from the debtors’ disposable income, but argued that they should have committed that income to the payment of unsecured creditors. The court concluded that the debtors had followed the letter of both the Bankruptcy Code and the Social Security Act in creating their bankruptcy plan, and that their omission of Social Security income “cannot constitute a lack of good faith.” Id. at 26.

Individuals and businesses in Los Angeles whose debt are greater than their income will allow them to pay can seek bankruptcy protection, so as to enable them to restructure and reorganize their debts and, in most cases, to actually discharge those debts entirely. Bankruptcy attorney Devin Sawdayi has been in private practice for over sixteen years and has vast experience helping clients in the Los Angeles and surrounding areas to rebuild their finances and their lives. To schedule a free and confidential consultation, please contact us today online or at (310) 475-9399.

More Blog Posts:

Student Loans and Bankruptcy, Part 1 – Are They Ever Dischargeable? Los Angeles Bankruptcy Lawyer Blawg, May 28, 2013

A Chapter 13 Bankruptcy Can Help You With Your Large Student Loan Debt, Los Angeles Bankruptcy Lawyer Blawg, May 21, 2013

Photo credit: By Social Security Administration [Public domain], via Wikimedia Commons.