Two new court opinions were recently handed down by the 5th and 10th Circuit Court of Appeals on the issue of whether Social Security income is considered “projected disposable income” under the Bankruptcy Code.  Projected disposable income is income that must be paid over to creditors during a 3 to 5 year Chapter 13 payment plan.

In the Matter of Benjamin Ragos, the 5th Circuit Court of Appeals upheld the ruling of a Louisiana bankruptcy court which ruled that, pursuant to Section 407 of the Social Security Act, income from Social Security is not projected disposable income in calculating the chapter 13 payment.  The court rejected the Chapter 13 Trustee’s argument that such income should be included and further rejected the Trustee’s argument that the failure to include such income constituted bad faith thus preventing confirmation of the debtor’s payment plan. 

We cannot square Trustee’s argument with the apparent intent of Congress. If Congress excluded social security income from current monthly income and disposable income, it makes little sense to circumvent that prohibition by allowing social security income to be included in projected disposable income.”

Section 407(a) of the Social Security Act provides that “none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.”

In the case of Fred Fayette Cramer, the 10th Circuit Court of Appeals also ruled that Social Security payments should not be considered as projected disposable income in Chapter 13 cases as well, and the court also ruled that the failure to pay such income to creditors does equal bad faith in confirming the plan.  

When a Chapter 13 debtor calculates his repayment plan payments exactly as the Bankruptcy Code  and the Social Security Act allow him to, and thereby excludes SSI, that exclusion cannot constitute a lack of good faith.”

How is Social Security income treated in Nebraska bankruptcy cases?  The answer was given in the case of Fink v Thompson by the 8thCircuit Bankruptcy Appellate Panel (In re Thompson), 439 B.R. 140, 144 (B.A.P. 8th Cir. 2010).  The 8thCircuit stated that “[t]he plain language of the Bankruptcy Code specifically excludes Social Security income from a debtor’s  required payments in a Chapter 13 plan.”   (see also Carpenter v. Ries (In re Carpenter), 614 F.3d 930, 936-37 (8th Cir. 2010) (“§ 407 operates as a complete bar to the forced inclusion of past and future social security proceeds in the bankruptcy estate.”)

It is now very clear that neither the monthly income received by a retired or disabled debtor nor the lump sum payments typically associated with disability claims are at risk in either Chapter 7 or Chapter 13 cases.