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Using Bankruptcy to Save Your Income: Social Security

Splitting Money - optimizedBy Columbia – Lexington Bankruptcy Attorney Lex Rogerson

Social security is protected against most creditors but can be reduced if you owe money to the federal government.  Bankruptcy can often fix that problem.

In America, Social Security is sacrosanct.

In politics, it’s sometimes called the “third rail.”  Like the electrical power strip in a subway tunnel, you touch it and you die – a colorful way of saying that politicians who try to mess with senior citizens’ benefits have a tendency to get beaten at the ballot box.

In the field of debt collection, too, social security gets special treatment. The theory is that benefits are intended to provide the basic necessities of life for seniors and the disabled, so money from the program should go to those people, not their creditors.

For this reason, social security income generally isn’t considered in determining whether a debtor in bankruptcy has to pay his creditors. And both in bankruptcy and otherwise, creditors can’t seize a recipient’s benefits – unless the creditor is Uncle Sam.

Federal debt collection

In 1996, Congress passed the Debt Collection Improvement Act, which effectively made the U.S. Department of the Treasury the official collection agency for the federal government.  Federal agencies are required to refer all non-tax debts that are over six months delinquent to Treasury’s Financial Management Service. At that point, FMS can collect through most of the same collection procedures the IRS uses for delinquent taxes.

That’s a scary thought. The IRS is the ultimate strong-arm creditor. In addition to filing liens and intercepting tax refunds, it can seize assets without a court order. And even in states like South Carolina that don’t allow wage garnishment, it can order employers to send the government part of your paycheck.

Through the Treasury Offset Program, the government can also seize or federal benefits of various kinds, including social security payments.  Depending on the amount of the debt and the monthly benefit amount, the payment could be reduced as low as $750. Try living on that much income sometime and you’ll see what a powerful weapon this is.

The good news is that most debts the government can collect by social security offset are dischargeable in bankruptcy.

What is federal non-tax debt?

A federal debt can potentially arise almost any time you do business, direct or indirect, with the U.S. government. A few common examples are:

  • a charge account or bounced check with a commissary run by the Army and Air Force Exchange Service (AAFES)
  • an overpayment of salary or benefits to a federal employee
  • a default on a home loan insured by HUD or the VA
  • an unpaid small business loan
  • a food stamp overpayment
  • a dispute over work under a federal contract
  • a consumer complaint with the Federal Trade Commission
  • misused grant funds
  • license fees of various kinds

While there are exceptions for unusual circumstances like fraud or misappropriation of funds, debts like these are usually dischargeable. Filing bankruptcy would result in resumption of full social security benefits.

The result may be different for other federal debts.

  • Federal student loans cannot be discharged except in the most extreme situations.
  • As discussed in an earlier article, federal taxes are often non-dischargeable, including income taxes for recent years.
  • Under the doctrine of recoupment, some courts hold the government can recover past social security overpayments by reducing future social security benefits, but other courts disagree.

In these situations, bankruptcy may not restore full benefits.

When to act

Before the Treasury Department can start taking social security benefits, it must send a 60-day warning letter informing you when the offset will begin. The letter will indicate which federal agency claims you owe money and how the offset is calculated. If you are interested in finding out whether bankruptcy would help, it’s wise to consult an attorney quickly after receiving such a notice in order to increase the chance of stopping the offset before it starts.

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  1. […] our last post, we looked at how bankruptcy can prevent the federal government from reducing social security […]

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