Bankruptcy protection under Chapter 13 is available to individuals with regular income whose debts fall within certain statutory limits.

Chapter 13 debtors are permitted to retain their property interests subject to a court-approved payment plan in which they must agree to pay creditors out of future income.

If you are considering filing for Chapter 13 Bankruptcy, you may be wondering about how Social Security benefits will impact your case.

Are Social Security benefits protected in Chapter 13 bankruptcy? How will your benefits impact your ability to seek bankruptcy protection?

Please don’t hesitate to contact our experienced Texas bankruptcy attorneys today for further assistance.

A recent case from the U.S. Fifth Circuit Court of Appeals provides some important guidance on this issue. In re Ragos, the appellate court upheld the ruling by a bankruptcy court — determining that Social Security benefits can be excluded when calculating disposable income and projected disposable income available to creditors in a Chapter 13 plan.

Background of the Case

In re Ragos, the debtors, a married couple, voluntarily filed a joint Chapter 13 bankruptcy petition. According to court records, the actual amount of Social Security benefits received by Mr. and Mrs. Rago totaled $1,854. Beyond that, the couple was also collecting $2,859.00 in income from retirement benefits and $2,599.65 in monthly take home pay.

When filing for Chapter 13 bankruptcy protection, debtors are required to declare their income.  However, it is not always clear what exactly should be declared.

In their itemized schedule of current monthly income, Mr. and Mrs. Rago included only $200 in monthly Social Security benefits. Then, they filed a proposed 60-month payment plan using the declared amount as a basis for structuring payments to creditors. Notably, $1,654 per month in Social Security benefits was not declared by Mr. and Mrs. Ragos. After receiving the proposed Chapter 13 repayment plan, the trustee filed an immediate objection.

The Trustee’s Objections and the Bankruptcy Court’s Ruling

In filing its objection, the Chapter 13 trustee made a relatively straightforward case: they asserted that confirmation of the proposed plan should be denied because the debtors did not dedicate 100 percent of their Social Security income to the plan.

The trustee argued that the plan that had not been proposed in good faith since the debtors were willfully retaining for themselves almost 90 percent of their Social Security income at the expense of their unsecured creditors. Under the proposed plan, the unsecured creditors would receive payments totaling only 38% of their claims.

The Initial Decision From the Bankruptcy Court

This case was originally reviewed by the United States Bankruptcy Court for the Eastern District of Louisiana. Writing for the court, Judge Elizabeth W. Magner rejected the Trustee’s arguments. In her opinion, she determined that that certain statutory language found in the provisions of the Bankruptcy Code and in the Social Security Act clearly signaled an intent by Congress to exclude Social Security benefits in calculating projected disposable income.

More specifically, she pointed to Section 407 of the Social Security Act. Included within this section is a provision on Social Security benefits and “bankruptcy or insolvency law”. Judge Magner noted that this statute — enacted in 1983 — exempts Social Security benefits from being considered for addressing privately held debts.

Appeal: The Fifth Circuit’s Ruling

The Chapter 13 bankruptcy trustee appealed the ruling from the bankruptcy court. On appeal, the Fifth Circuit affirmed the Bankruptcy Court’s decision. The court examined the same provisions of the Bankruptcy Code which expressly excluded Social Security benefits from the definition of “current monthly income” received by the debtor, and concluded that it could likewise be inferred that Congress intended to exclude Social Security benefits from calculations of “projected disposable income.”

Beyond that, the Fifth Circuit further held that it was not a per se violation of the good-faith requirement for the debtors to retain the disposable portion of their Social Security benefits for themselves rather than make it available for payment of debts owed to their unsecured creditors.

The debtors were not acting in bad faith, said the court, by merely doing what Congress has permitted them to do. The Fifth Circuit cited other rulings supporting the court’s determination that were issued by U.S. Courts of Appeals in the Sixth and Eighth Circuits.


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The Lesson: Social Security Benefits Receive Considerable Protection

For the most part, United States bankruptcy law offers considerable protection to Social Security benefits. This is an important point if you are considering filing for Chapter 13 bankruptcy protection. With Chapter 13, your repayment plan will always depend on your current income and your anticipated income over the next several years. It is crucial that Social Security benefits are not improperly included.

In filing for Chapter 13, a bankruptcy petitioner is generally required to complete and submit two income disclosure forms: a means test form and an income and expenses form. In Texas, Social Security benefits can generally be excluded from the income for the purposes of Chapter 13 bankruptcy calculations. Though, there are some exceptions. Notably, a bankruptcy trustee may attempt to include Social Security benefits in your plan. You need to challenge this immediately — if you fail to take action, you may lose your right to do so.

Of course, it must be noted that bankruptcy laws are subject to frequent change. Individuals facing bankruptcy are urged to consult with a competent attorney experienced in these matters to ensure that their legal rights are protected.

If you are considering filing for Chapter 13 bankruptcy protection, and you or your spouse currently receives or will soon receive Social Security benefits, our experienced bankruptcy lawyers can help protect your legal rights and financial interests.

Do You Have Questions About Chapter 13 Bankruptcy?

At the Law Office of Simer & Tetens, our expert Waco, Texas bankruptcy lawyers are here to help.

If you have any concerns about Chapter 13 bankruptcy, Social Security benefits, or any other financial issues, we are available to answer all your questions.

To schedule a free, fully confidential initial consultation, please do not hesitate to contact our law firm today.

From our office in Waco, we handle bankruptcy cases throughout Central Texas, including in McLennan County, Falls County, Hill County, Limestone County, Coryell County, and Bosque County.


We will do our best to accommodate your busy schedule. Request a consultation today!

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