The second notable way Social Security benefits are treated in bankruptcy cases are as an asset. Funds that are received from the Social Security Administration and can be traced back to that source are fully exempt. This is especially important in a state like Texas, which does not provide a bankruptcy exemption for money in bank accounts.
In Texas, we have two sets of exemptions available to us in bankruptcy cases: Federal exemptions and Texas exemptions. The Texas exemptions are very powerful in that they can allow a person to protect a homestead up to an unlimited value. Texas exemptions are also very good at protecting annuities. However, Texas exemptions are not very good at protecting cash in bank accounts, stocks, bonds, mutual funds, and cash on hand. Any money in these types of accounts on the date the bankruptcy petition is filed is nonexempt property and can be seized by the trustee for the benefit of the creditors.
Federal exemptions can be used to protect financial accounts and are very flexible. One of the exemptions available to debtors is called the Wild Card exemption. The Wild Card can be used to protect any type of asset, including financial accounts and cash. Like the Texas exemptions, the federal exemptions also provide a homestead exemption, but it is limited and does not offer as much protection as the Texas homestead exemption. In fact, as the homestead exemption is used, the Wild Card exemption is reduced.
When a debtor has significant equity in a house and needs to choose Texas exemptions, all money in his bank accounts is nonexempt, and a Chapter 7 trustee can seize the funds to that they can be paid to the unsecured creditors. However, when the debtor’s income comes from Social Security, he can exempt the funds in his account as well, allowing him to protect his cash and his homestead.