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Filing for bankruptcy while on Social Security

The days of retiring debt free are long gone for many of New Jersey's elderly residents. Now, many worry that their Social Security benefits will be garnished in order to pay their debts. Those benefits may be safe from some creditors, but not all. Filing for bankruptcy could help.

Private creditors and debt collectors may not be able to reach Social Security benefits due to protections given to recipients under federal law. The benefits need to be deposited into a bank account for this to work, however. Fortunately, the majority of people receiving benefits have direct deposit. For those who still receive a paper check, the funds could be in jeopardy.

The situation is different, however, if the debt is owed to a government entity. For instance, if a New Jersey resident on Social Security owes income taxes, federal student loans or has a federally backed mortgage, the government may garnish a portion of any benefits received. States may also garnish a person's benefits for alimony or child support. It may seem that an individual who is old enough to collect Social Security would not have some of these debts, such as student loans or child support, but with the many changes that have occurred in society, it is entirely possible. The percentage that can be garnished depends on the debt.

What can a Social Security recipient do in order to avoid a substantial portion of his or her benefits from being garnished? Payment plans are often available, but if someone's financial situation leaves nothing left at the end of the month, it may make sense to file for bankruptcy. Some tax debt may be discharged, and on rare occasions, student loan debt might be as well. Even if that is not possible, bankruptcy could free up income by discharging credit card and medical debts, among others. This could relieve at least some of the financial stress that is robbing many seniors of the right to enjoy their retirement.

Source: U.S. News and World Report, "Is My Social Security Safe From Debt Collectors?", Maryalene LaPonsie, Sept. 17, 2015

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