The Bankruptcy Law Clinic Blog

Thursday, September 27, 2012

How Disability Income Can Affect your Bankruptcy Filing

If you are receiving disability income, regardless of whether the income is from private insurance or social security, Florida has a statute that keeps this income safe from creditors who seek judgment against you.  This means that most creditors cannot garnish your disability wages or seek such garnishment in a court judgment.  I say “most creditors” because there is IS an exception—the IRS.  If you owe back taxes, the IRS can indeed garnish your disability wages, within reason.  However, other than the IRS, creditors cannot garnish your disability wages attempting to recoup money you owe them.

Because of this statute, many people think that their disability income will not be a factor when filing for bankruptcy.  After all, if the wages can’t be touched by creditors, the bankruptcy court must ignore them, right? 
Unfortunately, it’s a little more complicated than that.  If you receive disability income and you decide to file for bankruptcy, that disability income will be considered when your bankruptcy attorney conducts a means test analysis.  If your disability income is significant because of private disability insurance, your attorney might suggest that you avoid filing bankruptcy and pay back your debts with the disability income you receive.  Otherwise, the court might that you fall within the “abuse standard” of bankruptcy and are capable of paying back the money you owe.      
“But wait, I thought disability proceeds were exempt!”
This is where many people become confused regarding the bankruptcy code in Florida.  Yes, disability proceeds are exempt from judgments against you but the court will still consider disability proceeds for the purposes of the means test analysis.  For example, if you were a highly-paid executive who receives $25,000 per month in disability insurance from a private disability policy, the court will likely look at this as significant income to repay your debts rather than granting you discharge of them in bankruptcy

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