Are Social Security Disability Settlements Protected in Bankruptcy?

Recently a chapter 7 client of mine received a large sum of money from a Social Security Disability claim. He was awarded this money as payment for retroactive Social Security benefits that accrued while his disablity claim was pending.

Are Social Security  Disability awards protected in bankruptcy?

In 2010 the Eight Circuit Court of Appeals issued a ruling which confirms that Social Security Disability settlements are protected in bankruptcy. In re Todd Carpenter, 08-6046.

Todd Carpenter received a lump-sum payment of $17,165 for retroactive benefits when his disability status was determined by the Social Security Administration. Those funds were deposited into a bank and kept separate from all other funds. Shortly prior to filing, the debtor converted the funds in the bank account to a cashier's check. The question before the court was whether the funds were part of the bankruptcy estate and whether the Chapter 7 Trustee had a claim to the funds.

The appeals court held that the treatment of Social Security payments is not governed by bankruptcy law, but rather it is governed by a separate federal statute, Section 407 of the Social Security Act. The relevant part of the act is as follows:

(a) The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution . . . or to the operation of any bankruptcy or insolvency law.

After dissecting the language in Section 407 of the Social Security Act, the Court held that "such [Social Security payments] are not property of the bankruptcy estate." This holding means that Social Security payments are protected from the claim of a Chapter 7 Trustee.  According to the 8th Circuit Court of Appeals, such disability awards are not part of the bankruptcy estate and are thus beyond the reach of the Chapter 7 Trustee.

This was great news for our client since he not only received a discharge of his debts through the Chapter 7 bankruptcy but he was able to keep his lump sum payment from Social Security as well.