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FAQ: Should I file bankruptcy to deal with debt if Social Security is my only income?

Those who have reached the point where their only income is Social Security and may still have a lot of debt or even a small amount of debt that they cannot pay.  For some, bankruptcy might come to mind as the only option they have to deal with their liabilities. This isn’t always the case.

Social Security Income (which includes retirement, disability, dependents, and survivors’ benefits) is one of the few sources of income that most creditors cannot touch through garnishment.  Since it is a federal source of income, any federal debts (think federal income taxes and delinquent student loans) can be garnished up to 25% each month until the debt is paid, or the debtor takes some other action to stop the garnishment.

Federal Government Debts

If one does owe tax debt to the federal government and is only on social security income, that person will have to take certain steps to make sure they deal with it.  The two main options likely will be either filing an Offer in Compromise (OIC) or applying for Current Not Collectible (CNC) status.  An Offer in Compromise is when you apply to settle for less than you owe on the total amount of tax debt.

Currently Not Collectible status is when you halt all collection activity by the Internal Revenue Services (IRS) by proving you do not have the ability to make any monthly payments on the debt.  This status can be reviewed by the IRS every few years to see if anything has changed in your financial situation.

Student Loans

If you have defaulted student loan debt, you may have the option to either consolidate your debt or rehabilitate your debt. Consolidation means taking your outstanding student loans and having the government issue a new loan included all the student loan accounts. Rehabilitation requires you to make nine on-time payments on your student loans; these payments are often based on  your finances and can be as low as $5.00. Both these options allow a borrower to bring the student loan accounts out of default status. You may only use each option once.

Additionally, if haven’t defaulted yet, but you just cannot afford to pay on your federal student loans, you may qualify for an Income Based Repayment plan that bases payments solely on income; many individuals living solely on Social Security can qualify for a zero dollar payment for federal student loans.

Other than federal debts, other creditors cannot garnish SSI.  This includes any regular creditor who gets a judgment against you, your car loan company, your homeowner’s association, your credit cards, and even state taxing authorities.  Because of protection, if you do now owe the federal government any money, you may be better off just not paying our creditors instead of filing bankruptcy.

Bankruptcy is an Option

A lot of factors go into whether bankruptcy is the right option for you, including the amount of debt, assets, potential changes in your situation and whether you will need a good credit score moving forward.  If you have one annoying creditor who keeps calling and sending letters, but the debt is only like $4,000.00 it probably not worth it to file a bankruptcy.  However, if all your debt is over $15,000.00 and you want to clean up your credit because your car is on its last legs than maybe bankruptcy is the right path for you.  Even if you are just on Social Security, bankruptcy can clean up your credit and give you the option to get a better interest rate once you get your discharge.

Collection Proof

Many creditors will stop bothering you if you simply tell them that the only income that you have is Social Security and they won’t be able to collect from you.  It is often a good idea to write them a letter explaining this issue.

Due to this protection, many people think that when creditors cannot collect from them it means they are “judgment proof.”  That is not correct.  Creditors can still take you to court and get a judgment for the money you owe; however, even with the judgment does not allow them to collect your Social Security income, therefore making you “collection proof.” Typically, a creditor gets a judgment to allow them to collect from someone using things like wage and bank garnishments. Even if a creditor does not think they will collect on the debt, a creditor may still want a judgment to in case you get new income in the future or obtain a windfall, like winning the lottery or an inheritance.

Collection Activity

If you do have any creditors trying to collect, it is important to keep your Social Security income separate from any other income/funds that you or anyone you share an account with.  The moment funds are commingled they may lose their protection from creditors (or make it more difficult to prove). If you have other money, such as a part-time job, money from family, other savings, those funds are still subject to collection by a creditor.

Other Assets or Income

This protection and advice about doing nothing is limited to those with only Social Security income and limited assets. If you have any assets that have value, you may need to actively take some action.  Even with just Social Security income, if you have a house and a creditor gets a judgment against you, the creditor can then file that judgment in the land records where your house is.  This will protect their interests and if you ever sell that asset they will get paid from the proceeds of the sale.  Additionally, if you have additional money in savings account or non-retirement accounts, then creditors may have the ability to collection from you.

Similarly, sometimes even if someone cannot be collected from, they want to file bankruptcy to wrap up their outstanding debts. If creditors will not back off from collections, bankruptcy can force creditors to stop collection activity against you. At the end of the day, your options depend on the specifics of your situation and what your motivations and goals are.

If you are concerned about your debt and want to review your options, please schedule an appointment with Virginia bankruptcy lawyer Ashley F. Morgan. She offers a few consultations for debt issues.