Will you lose your government benefits in bankruptcy?

The federal government has many programs available to assist citizens and their families if they face financial hardships. This financial assistance can make a big difference for families struggling to make ends meet.

However, the United States Census Bureau reports that families who receive at least one kind of government aid held about the same amount of debt as those who did not participate in such benefit programs. Managing debt can feel overwhelming in any situation, but families receiving benefits may feel even more stressed. Their first worry often revolves around whether or not they will lose the benefits they need if they decide to file bankruptcy.

What happens to benefits?

There is a wide range of government benefits you may receive, including, but not limited to:

  • Social Security Disability benefits
  • Supplemental Security Income
  • Veterans’ benefits
  • Medicaid

You and your family rely on these benefits. Thankfully, you can still seek debt relief while maintaining these critical benefits. Both federal and New Mexico rules classify most government benefits as exempt property in a bankruptcy filing. In fact, New Mexico law specifically protects most kinds of government and public benefits in bankruptcy.

In short, you will likely not lose your government benefits if you move forward with bankruptcy.

3 important things to remember

Additionally, those benefits would be excluded from the liquidation process. Your right to receive these benefits is typically exempt in all chapters of bankruptcy under either Federal or New Mexico exemptions.

Even so, there are a few things you should note:

  1. Some income benefits are excluded from the Means Test: Benefits such as Social Security Income and Social Security Disability do not count as income for the Chapter 7 Means Test, therefore they will not count against your qualification for bankruptcy.
  2. You have to record benefits received as assets: You will still have to list any government benefits received as property in your bankruptcy petition. Your right to receive benefits is often exempt, however once payments have been received, some benefits are the same as any other cash or funds in an account. In such circumstances, miscellaneous or “residual” exemptions often still apply to exempt funds you have already received. For specific answers as to whether benefits you have received are exempt, speak with an experienced attorney.
  3. Keep track of your benefits: Combining your government benefits with other financial assets – such as your primary bank account – could cause complications when trying to differentiate what property is exempt or nonexempt.

Navigating the process of bankruptcy and identifying and categorizing your assets can be complex. That is why it is helpful to consult an experienced bankruptcy attorney to understand your rights, determine how you can move forward and secure your government benefits in these cases.