My Bankruptcy Law Network colleague Craig Andresen has written about a very interesting federal appeals court case which holds that a lump sum payment from Social Security representing past due disability benefits are excluded from one’s bankruptcy estate by virtue of Section 407 of the Social Security Act.
Until this point I have operated under the assumption that a past due benefit lump sum had to be squeezed into an exemption to protect it for a bankruptcy debtor. Official Code of Georgia section 44-13-100(a)(2) excludes from the bankruptcy estate “the debtor’s right to receive a Social Security benefit” or a “disability benefit.” When representing a debtor who gets approved for Social Security disability, I have been filing a motion to declare the lump sum exempt under the Georgia exemption and I have been including in my motion assertions that the debtor needs these funds for support and maintenance.
If Craig’s analysis is correct, however, the Georgia exemption argument would be superfluous. He cites an 8th Circuit Bankruptcy Appellate Panel decision called Carpenter v. Ries in which the 8th Circuit held that Section 407 of the Social Security Act excludes all Social Security funds, lump sum or otherwise, from the bankruptcy estate.
Under the logic of Carpenter, there is no need for a bankruptcy debtor to account for his Social Security lump sum at all. I can imagine a scenario where a debtor has proposed a Chapter 13 plan that pays 2 cents on the dollar to unsecured creditors, and the Chapter 13 trustee has no claim on a $50,000 lump sum Social Security payment sitting in a segregated savings account, representing past due benefits.
The Carpenter case would have a much greater impact in states like Alabama, where there does not appear to be any state law protection for Social Security benefits. Debtors there could really benefit from federal law protection of lump sum Social Security disbursements.
Georgia is part of the 11th Circuit, and 8th Circuit law is not binding on cases filed here but federal circuit court decisions do carry some influence. It will be interesting to see if a case with bad facts like the scenario described above might cause the 11th Circuit to rule differently than the 8th, possibly setting up a Supreme Court showdown.