Disability and Bankruptcy

For those with a disability resulting in costly medical bills, opting for bankruptcy may be a solution for relief from these bills. However, many are unfamiliar with the bankruptcy process and with the impacts the process has (and doesn’t have) on their financial assets.

It is no surprise that individuals are concerned about the bankruptcy process. After all, a sound financial situation allows those with disabilities to take care of their medical needs both in the present and future. For these reasons, I decided to compile some information about going through the bankruptcy process as a disabled person. Keep reading below! It may end up helping you or a loved one in the future! 

The Impact on Disability Benefits

Disabled Americans are entitled to compensation from the federal government through Social Security Disability Insurance or Supplemental Security Income benefits. Additionally, disabled individuals may receive benefits from state or private programs. 

Usually, the disability benefits received are protected from being seized during the bankruptcy process. However, there are some exceptions. These exceptions may depend on a variety of factors, including: 

  • The type of bankruptcy that you file
  • Where your benefits are coming from 
  • If you receive ongoing benefit payments or a lump sum payment for past benefits
  • Exemption rules in your state

Regarding the last point, it is important that you learn about the specific exemption rules in your state because they may impact what you are able to keep during your bankruptcy experience. 

SSDI Benefits and Chapter 7 Bankruptcy 

Most people file a Chapter 7 Bankruptcy, which means the court sells your assets not protected by an exemption and spreads out the profits from your creditors. Point number three in the above list becomes extremely relevant here. If you routinely receive monthly benefits for your disability, you will usually be allowed to keep them as the bankruptcy judge will understand that debtors use this money to sustain themselves as they are unable to work. However, if you receive a lump-sum payment for past disability benefits you are entitled to, you must prove that this was an SSDI benefit. You do this by tracing the deposit. Though most jurisdictions will exempt a lump sum payment, in other jurisdictions the trustee will be able to take a portion of your lump-sum payment. 

Contacting An Attorney

If you are disabled and are thinking about initiating the bankruptcy process, one of the best things you can do is reach out to a bankruptcy attorney. An attorney will be able to answer all of your questions, especially questions about whether your disability benefits will be protected during the process. As the rules vary depending on the jurisdiction, it is important to reach out to a bankruptcy attorney in your particular area for the most accurate and reliable information. 

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