How does a large lump sum of SSDI back pay effect filing for bankruptcy?

Question

My aunt was finally approved for SSDI at the end of 2023 and started receiving monthly payments in January 2024. She hasn't worked in 10 years and SSD is her only source of income (there's no pension, no IRA, no anything else). Her savings are long gone and she's been living on public assistance the past few years. She is now being sued for about $40k in credit card debt and was advised to file for bankruptcy. The issue is that at the end of May she received a large lump sum payment in SSDI back pay. Her SSDI is direct deposited into a checking account that was set up for this purpose. She pays all her living expenses from this account. If she declares bankruptcy is the lump sum protected from creditors like the monthly SSD benefits are? If the lump sum does not have to be included in the Chapter 7 means test, they will still see it in her bank account, does that put it at risk?

Daniel Michael Luisi · Answer

Most disability payments are exempted from inclusion in the bankruptcy estate and thus protected under the Social Security Act. Additionally, on the state level (thus potentially obviating the need to file bankruptcy), the New York Exempt Income Protection Act exempts disability payments from judgment enforcement. Yet, in order to take advantage of these legal protections, the debtor must know how to effectively preserve and assert their rights; something which rarely happens with self-represented litigants.

James L. Arrasmith · Answer

In general, Social Security Disability Insurance (SSDI) benefits, including lump sum back payments, are protected from creditors during bankruptcy proceedings. This protection is provided under federal law, specifically the Social Security Act, which exempts these benefits from bankruptcy estates and creditor claims. 
 
However, there are a few important considerations: 
 
1. Commingling of funds: If the SSDI back pay is deposited into an account that also contains non-exempt funds, it may be more difficult to protect the SSDI money. It is advisable to keep SSDI benefits in a separate account to avoid commingling. 
 
2. Means test: While SSDI benefits are not included in the Chapter 7 means test, the lump sum back pay may still be considered when determining your aunt's ability to pay creditors in a Chapter 13 bankruptcy. 
 
3. Timing: If your aunt spends the lump sum back pay on non-exempt purchases or transfers the money to others before filing for bankruptcy, the funds may lose their protected status. 
 
To ensure the best possible outcome, your aunt should consult with a qualified bankruptcy attorney who can provide guidance specific to her situation. The attorney can help her properly disclose the SSDI back pay, protect it from creditors, and navigate the bankruptcy process while minimizing risks to her benefits. 
 
It's crucial to be transparent about the SSDI back pay during the bankruptcy proceedings and to follow the advice of a knowledgeable attorney to maintain the protected status of these funds.

Q: How does a large lump sum of SSDI back pay effect filing for bankruptcy?