Navigating Bankruptcy and Disability Benefits: What You Need to Know
Facing financial hardship while dealing with a disability can be an overwhelming and challenging experience If you are a recipient of disability benefits and considering bankruptcy in these states, it’s essential to understand how these two aspects interact within bankruptcy law, both in Nebraska and Iowa.
Understanding Disability Benefits
In both Nebraska and Iowa, disability benefits provide vital financial assistance to individuals who are unable to work due to a disability or medical condition. These benefits can come from various sources, including:
- Social Security Disability Insurance (SSDI)
- Supplemental Security Income (SSI)
- VA disability
- Or from a private disability plan from an employer or one that is purchased by an individual.
There is a big difference between government provided (Federal, Nebraska or Iowa) and benefits received from a private policy. Knowing the difference when facing severe financial problems is critical.
Bankruptcy and Disability Benefits
One of the primary concerns for individuals on disability contemplating bankruptcy is how their disability benefits will be affected, especially when the benefits may be paid in a lump dating back to the day of application, which could be a sizeable amount.
The good news is that virtually all disability benefits provided by a governmental source, including SSDI, SSI and benefits from the Veterans Administration, are protected from creditors during bankruptcy in both Nebraska and Iowa.
These benefits are almost universally considered exempt property, meaning they cannot be used to satisfy debts in bankruptcy proceedings. That said, an individual filing bankruptcy may choose to voluntarily use these benefits to their advantage, especially in Chapter 13 cases.
Separately, funds received from a governmental entity for disability should never be put into an account that has other sources of deposits. For example, you would not want to share an account with another person that is depositing payroll into the same account.
This mixes the funds (called commingling of funds) and in many instances causes the protection that is afforded by law to be waived. And, even if a person has been commingling funds for some time, taking action to stop this practice should be done immediately to establish, in the future, that the funds are unique and exempt. Along this same line, do not mix private disability payments with government issued payments. Most private disability funds are not protected.
Chapter 7 Bankruptcy and Disability Benefits
In both states, Chapter 7 bankruptcy allows for the discharge of eligible debts, while non-exempt assets may be liquidated to repay creditors. An experienced bankruptcy attorney will be able to properly advise if there is any risk of losing assets before a case is filed. There may also be ways to mitigate or eliminate the potential liquidation of assets in a legal and ethical manner.
That said, no assets should ever be transferred when contemplating bankruptcy without professional advice from a bankruptcy attorney. As mentioned above, disability benefits received from a governmental source are typically exempt, and recipients can continue receiving their benefits even during the bankruptcy process.
It’s crucial to notify the bankruptcy trustee, via your attorney, about your disability benefits and provide documentation to ensure their protection. Always be sure to share complete information of all sources of income with your attorney so he or she will be able to carefully guide you through the process.
Chapter 13 Bankruptcy and Disability Benefits
In Nebraska and Iowa, Chapter 13 bankruptcy involves creating a repayment plan to settle debts over time. Each plan is different, and the payment amount takes analysis of income and assets to properly determine the amount.
Disability benefits from a governmental source are generally NOT considered part of your disposable income when calculating the repayment plan but it may be voluntarily used to help make the payment.
Private disability is considered in calculating disposable income. However, the fact that you receive disability benefits does not disqualify you from filing for Chapter 13 bankruptcy. In fact, it may help determine the feasibility of the repayment plan and make it more manageable.
Additional Concerns for Individuals with Disability Considering Bankruptcy
In addition to the general considerations, individuals on disability have specific concerns related to their unique circumstances and the state’s legal nuances.
Some common concerns include:
Exemptions for Disability Benefits: Both Nebraska and Iowa have specific bankruptcy exemptions that protect government funded disability benefits from creditors but remember the commingling warning from above. There are also Federal exemptions in addition to those provided by the state. These exemptions are crucial for preserving your benefits during bankruptcy. An experienced bankruptcy attorney will help you understand the applicable exemptions in your state.
Ability to Repay Debts: Limited income from disability benefits might make individuals concerned about their ability to repay debts through bankruptcy. They may wonder if they can afford a repayment plan in Chapter 13 bankruptcy or if Chapter 7 bankruptcy will lead to the loss of assets they rely on. However, it cannot be overemphasized how each bankruptcy case is unique and one should not assume what a bankruptcy is able to provide or not provide without an opinion from a very experienced bankruptcy attorney in your state. Many people make assumptions that are frequently not true with disability payments and bankruptcy.
Chapter 7 vs. Chapter 13: Deciding between Chapter 7 and Chapter 13 bankruptcy depends on your financial situation, including your income, assets, and debt. While Chapter 7 offers a quicker discharge of debts, Chapter 13 allows for a repayment plan (the percentage of payback varies greatly between cases) to manage debts over time. Your disability benefits and other income sources can sometimes be considered when determining which chapter is appropriate for you.
Social Security Overpayments: If you received Social Security overpayments, it’s important to address this issue during bankruptcy. The treatment of overpayments can vary, so it’s best to consult with a knowledgeable attorney to understand how it will be handled. Contrary to popular belief, and in the absence of bad faith, Social Security and private disability over payments can be discharged in bankruptcy. However, the payor of the benefits may, in certain circumstances, have the right to defer future payments to recover their loss. This concept is called “recoupment” in the law and there are factual situations where recoupment is allowed and when it is not allowed.
Impact on Disability Benefits: Individuals on disability rely on their benefits to meet daily living expenses and medical needs. They may worry about potential reductions or termination of these vital benefits if they file for bankruptcy. Yet, in general, receiving disability benefits and filing bankruptcy are not related to each other. One does not waive any right to disability payments by filing bankruptcy. Either a personal qualifies for disability or they do not, regardless of whether bankruptcy is filed.
Impact on Medical Debts: Bankruptcy can help alleviate medical debts, including those related to your disability. A bankruptcy attorney can guide you through the process of discharging medical bills and managing your financial obligations. As mentioned above, a bankruptcy filing (to wipe out debts, including medical debts) generally has nothing to do with the right or qualifications to receive disability funds.
Our Team of Professionals is Here to Help
Navigating bankruptcy while on disability requires careful consideration by individuals filing bankruptcy in Nebraska and Iowa with the professional assistance of an attorney that is licensed to practice law in the relevant state. Much of the information on the Internet that is provided by non-bankruptcy attorneys, or a layperson/commenter, is simply not correct.
Moreover, legal advice must be obtained by a licensed attorney focusing their practice in the state in which you plan on filing bankruptcy in order to get an accurate assessment. By understanding the protections in place for disability benefits during bankruptcy and seeking professional guidance from attorneys familiar with the specific laws of these states, individuals can confidently make informed decisions, protect their essential benefits, and pave the way for a more stable financial future.
Our experienced and knowledgeable bankruptcy attorneys are well-versed in the laws of Nebraska and Iowa. We are here to help you every step of the way, addressing your specific concerns and tailoring solutions to your unique circumstances.
Schedule a free bankruptcy consultation to start your way to a brighter financial future.
