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

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.  1-855-Leaven-Law (855-532-8365).

Ryan N. Singleton, Esq.

Medicaid Planning: LeavenLaw Expands its Consumer Offerings

Bob and Carol are in their mid-seventies and were enjoying a comfortable, if modest retirement when Bob suffered a stroke which left him with limited mobility on one side of his body. After eight weeks of physical therapy he is told that he no longer needs “skilled nursing” care and will be discharged from the rehabilitation center.  Although he has made some improvement in learning to function with his disability, he still requires the help of two people to rise from the bed or a chair, shower, or visit the bathroom. Help of this nature is defined as “custodial” care and is not covered by Medicare.

If, like Bob and Carol, you are stunned to learn that Medicare will not cover a nursing home stay for yourself or a loved one, you are not alone! Although most of us will spend time in a nursing home at some point in our lives, few of us actually prepare for this eventuality. Perhaps this is due to the assumption that Medicare or supplemental insurance will cover these costs. The fact is that Medicare was not designed for long term care for a chronic or irreversible condition such as Alzheimer’s, but for short term skilled care and rehabilitation for a limited time following an acute illness or injury, for example, recovery from a broken hip.

After a few days of frantic research, Bob and Carol come to understand that their options are limited. Carol is physically unable to manage Bob’s care at home, and their children live too far away to be of help on a daily basis. The cost of 24/7 home health care, as well as nursing home care at the private pay rate is far beyond their means.    

Paying for Long Term Nursing Home Care

With the average monthly cost of a nursing home care in Florida close to $8,000.00, an extended stay can wipe out the savings of all but the most affluent families. Many seniors with sufficient income and benefits to support a comfortable retirement suddenly find themselves wondering how they will finance the care needed during their final years, and this is where Medicaid enters the picture. While originally conceived to provide health care for the poor, it has become the largest single payer for nursing home care in the United States, and can fill a critical vacuum in helping a family to stretch its health care dollars. This is especially true when resources are needed to support a healthy spouse at home as well as subsidizing the care of a spouse in the nursing home.

It is crucial to understand that Medicaid is a means-tested program, with strict income and asset limits required for qualification. Ironically, many middle-class Americans are in position of having too many assets or income to qualify for Medicaid, yet lack the means to pay out-of- pocket for nursing home care. While legitimate qualifying strategies exist, application can be a complex process, and improper transfers of assets or insufficient documentation can result in lengthy periods of disqualification for benefits. Another factor to consider is that Medicaid rules differ from state to state, adding to the confusion and complexity of the program.   

LeavenLaw can help. We have the experience and resources to guide you through the Medicaid application process. We also provide a comprehensive suite of Elder Law services, including wills, trusts, durable powers of attorney, and probate administration. Feel free to contact LeavenLaw to schedule a  free consultation.  1-855-Leaven-Law (855-532-8365). 

Anne Webb Ricke, Esq.