Are Social Security benefits protected in Chapter 13 bankruptcy?

In the recent case of In re Ragos, the U.S. Fifth Circuit Court of Appeals upheld the bankruptcy court's ruling that Social Security benefits can be excluded when calculating disposable income and projected disposable income available to creditors in a Chapter 13 plan.

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.

Background of the case

In the Ragos, the debtors voluntarily filed a joint Chapter 13 bankruptcy petition. Their itemized schedule of current monthly income included a $200 portion of their monthly Social Security benefits. The actual amount of Social Security benefits received by the debtors totaled $1,854. The debtors filed a proposed 60-month payment plan providing that the creditors would receive all of the debtors' declared monthly net income, but the debtors would retain the undeclared balance of their Social Security benefits in the amount of $1,654 per month.

The trustee's objections and the bankruptcy court's ruling

The Chapter 13 trustee filed objections, asserting 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, and because the plan that had not been proposed in good faith, since the debtors were wilfully 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 percent of their claims.

The bankruptcy court rejected the Trustee's arguments, finding that certain statutory language found in the provisions of the Bankruptcy Code and in the Social Security Act signaled an intent by Congress to exclude Social Security benefits in calculating projected disposable income.

The Fifth Circuit's ruling

On appeal, the Fifth Circuit affirmed the Bankruptcy Court's decision. The court examined 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."

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.

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.