Social Security Income Safe from Bankruptcy Claims

Society Security benefits are protected from creditors in bankruptcy trustees seeking additional funds to pay off creditors in a Chapter 13 bankruptcy, the 9th U.S. Circuit Court of Appeals held last week.

The 9th U.S. Circuit Court of Appeals joined the 5th and 10th Circuits in similar rulings, which found that it is not “bad faith” for a debtor to exclude social security income in a plan to pay unsecured creditors.

The decision stems from the 2010 bankruptcy case of a Missoula, Montana couple, David and Sharon Welsh, who refused to include David’s Social Security income of $1,165 a month in the plan to repay $180,000 in unsecured debt.

The couple listed monthly income of $8,100 a month from Sharon’s job as a nurse, her monthly pension but declined to include David’s social security benefit.

They proposed to repay secure creditors for their home mortgage on a $400,000 home, three cars (including one driven by their doctor-daughter), an Airsteam trailer and two all terrain vehicles. But they proposed to repay just $15,000 of the $180,000 owed to unsecured creditors, the largest share being their daughter’s $60,000 student loan debt.

The trustee challenged the plan as a lack of good faith by the Welshes for excluding Social Security benefits.

The Bankruptcy Appellate Panel upheld the Welsh plan saying Social Security income is specifically excluded from the disposable income calculation in Chapter 13 cases. One of the BAP judges dissented saying the Welshes should reasonably be exposed to propose a plan that pays for debts on their home and necessary cars, but nothing suggests they needed, or should pay debts for their daughter’s car, the ATVs or travel trailer. He wanted to see the plan altered to include David’s Social Security income.

The 9th Circuit sided with the BAP majority, however. It found that even under the tougher terms Congress set under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, it excludes Social Security benefits in the calculation of “current monthly income.”

The National Association of Consumer Bankruptcy Attorneys praised the decision. “We are gratified that the court recognized that Congress wanted to protect these benefits from creditors, as it has done historically since the Social Security Act was passed,” said NACBA President Ed Boltz, in a prepared statement.

Case: In re: Welsh, No. 12-60009



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