When dealing with a medical hardship, it can also be difficult affording your living expenses. Sadly, it is common for people who have become disabled to lose their jobs. Combining the medical expenses with the loss of a job, you are left with mounting debt. Bankruptcy may be the solution.
However, without an understanding of the bankruptcy process you may worry about what happens to your disability benefits. Some people worry about whether they can keep their benefits. You usually get to keep your disability benefits when filing a bankruptcy case.
There are two types of disability benefits that people receive:
- Social Security Disability
- Private disability insurance
Social Security Benefits
The Chapter 7 bankruptcy and Chapter 13 bankruptcy are favorable to people that receive money from Social Security. Social Security disability benefits also receive favorable treatment in Chapter 7 or 13 bankruptcy cases.
Private Disability Insurance benefits
Private Disability Insurance is a policy that you purchase and pay premiums on monthly. Some employers provide such policies and the premiums are paid by payroll deduction.
Private disability insurance benefits are often based upon your salary when you become disabled and make the insurance claim. Not alll private disability insurance benefits are exempt in bankruptcy.
Chapter 7
Sometimes, Chapter 7 bankruptcy is called liquidation bankruptcy. During Chapter 7 a court-appointed trustee will sell your non-exempt assets and use that money to pay your creditors.
The court can discharge, or erase, some of your remaining debts after the trustee sells your eligible assets. After this, creditors can no longer collect on those discharged debts and you can get a fresh start on your finances.
To qualify to file under Chapter 7, you must pass a means test that assesses your income level. When calculating your means test it will not include Social Security Disability benefits.
Therefore, if you earn little or no income outside your Social Security Disability benefits, you will likely qualify to file under Chapter 7. However, it is still important to consult with an experience bankruptcy attorney about your eligibility.
Chapter 7 exemptions
When filing for Chapter 7 Bankruptcy only non-exempt assets can be sold or liquidated by the trustee. You retain the exempt assets.
Under Federal law, your Social Security Disability benefits are ordinarily exempt. However, you must segregate this income from other sources in order for them to be exempt. In other words, if you mix your Social Security Disability benefits with money from other sources, then the benefits may lose their protected status because they have become too intermingled and indistinguishable from other funds.
Chapter 13
Chapter 13 bankruptcy, unlike chapter 7, does not involve the sale of any of your assets. Instead, under Chapter 13, you must repay your debts according to a court-approved repayment plan over a three to five year period.
A repayment plan is structured based on your disposable income. But Social Security Disability benefits, however, are not included in the disposable income calculation.
Depending on how much income you have beyond your Social Security Disability benefits, you may have very little disposable income left to put toward your debts under a repayment plan. Under those circumstances, you may need to use the Social Security Disability benefits in order for your plan payments to be feasible.
If you are suffering from a long-term injury, illness or medical condition, and struggling financially, then why not see if we can help you? You should not have to go at this alone.
Contact us to see if filing for bankruptcy is right for you with a free consultation.