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Supreme Court Decision Enhances Debtors' Ability to Exempt Accumulated Social Security Benefits

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Protecting Social Security Benefits in BankruptcyOver the last 30 years, Courts have found ways to limit debtors’ exemptions in accumulated social security benefits.  The main basis for exemption of such funds is found under Social Security Act, 42 U.S.C. § 407, which states that “none of the money paid”…“under this subsection shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy of insolvency law.”  While this statute would seem to indicate that social security funds accumulated in a bank account should be 100% exempt, Courts have been able to limit this statute, specifically by citing the purpose of the Social Security Act.  This first occurred in Department of Health and Rehabilitative Services, State of Florida v. Davis, 616 F. 2nd 828 (5th Cir. 1980) which described the purpose of the social security Act as follows: 

“The purpose of social security benefits for the disabled is to provide for their care and maintenance. The purpose of the social security exemption is to protect social security beneficiaries from creditors' claims. Enacted as part of the original social security legislation, Pub.L. No. 74-271, s 208, 49 Stat. 622, 625 (1935), this exemption evinces a clear legislative purpose of precluding beneficiaries from diverting their social security payments away from the statute's seminal goal of furnishing financial, medical, rehabilitative and other services to needy individuals. 42 U.S.C.A. s 301.”   Id. At 831.

After identifying this purpose, the Fifth Circuit determined that the exemption provided by 42 U.S.C. § 407 may be limited when it does not impair the ability of the recipient to satisfy his or her basic needs.  The 11th Circuit has followed this holding and carved out an equitable exception to 42. U.S.C. §407.  See In re Treadwell, 699 F.2d 1050 (11th Cir. 1983) (finding that when the debtor’s ability to care for himself or herself is not implicated, Section 407 need to be applied); United States v. Devall, 704 F.2d 1513 (11th Cir. 1983) (holding that the assignment of social security funds to the Trustee will not affect the recipient’s ability to secure basic care and maintenance); Citronelle-Mobile Gathering, Inc. v. Watkins, 934 F.2nd 1180 (holding that a Debtor who had tens of thousands of dollars in other assets did not require his social security funds for his basic needs). 

The cases cited above have been the controlling law on the issue until just a few months ago.  On March 4, 2014, the United State Supreme Court heard the case of Law v. Siegel, 134 S.Ct. 1188 (2014), in which they decided whether the bankruptcy trustee could surcharge the debtor’s homestead exemption to cover his legal fees associated with removing a fictional lien from the property, which was created by the Debtor’s fraudulent misrepresentations.   In ruling against the Trustee, the Court held that federal law “does not give courts discretion to grant or withhold exemptions based on whatever considerations they deem appropriate.  Rather the statute exhaustively specifies the criteria that will render property exempt.”  It further states “the Code’s meticulous—not to say mind-numbingly detailed—enumeration of exemptions and exceptions to those exemptions confirms that courts are not authorized to create additional exceptions.” 

A case in Illinois has already applied the Supreme Court’s ruling in Law v. Siegel to the issue of accumulated Social Security funds.  The Court in In Re: Franklin, 506 B.R. 765, (C.D. Ill. 2014) cited Law v Siegal in holding that equitable exceptions to the Social Security Act’s exemption for social security benefits are not permitted.  The Court noted that the Trustee cited the 11th Circuit case of Citronelle-Mobile Gathering, Inc. v. Watkins 934 F.2d 1180 in his arguments and held that this case “has now been abrogated by the Supreme Court”…and is no longer good law.”

In conclusion, Bankruptcy Courts no longer have the power to deny or limit a Debtor’s exemptions for any reason that isn't specifically provided for under the Bankruptcy Code.  Therefore 42 U.S.C. § 407 operates to fully exempt a Debtor’s accumulated Social Security Benefits regardless of whether they are needed to satisfy their basic needs.

LeavenLaw is a civil litigation firm that represents consumers in matters related to unfair debt collection, credit reporting, bankruptcy, collection defense, mortgage foreclosure, and short sales as well personal injury and criminal defense.  If you have been injured, victimized or unfairly treated or deceived, please feel free to contact LeavenLaw to consider your case at a free initial consultation.  www.LeavenLaw.com  1-855-Leaven-Law (855-532-8365).

Ryan N. Singleton, Esq.