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Are My Social Security Funds Still Exempt in Bankruptcy?

arizona bankruptcy attorney

This picture has nothing to do with bankruptcy, but you can't beat an Arizona sunset.

As most of you probably know, the BAPCPA Bankruptcy Amendment really shook things up for bankruptcy lawyers. And let me tell you, we don’t shake very well. Surprisingly, we have adapted fairly well over the past 5 years. In many ways bankruptcy attorneys have been transformed into pioneers, navigating the unpracticed (and sometimes ambiguous) new guidelines.

A common area of ambiguity involves the handling of funds, once exempt, that imprudently converted to a non-exempt semblance prior to filing. Want an example? Consider the debtor that receives a significant social security payment prior to filing bankruptcy.

As many know, social security funds are exempt under Arizona bankruptcy law. What happens when that check is deposited into a checking account? What if that money is co-mingled with other funds? What if that money is used to buy non-exempt assets? You can see the dilemma.

Over the past 5 years, most conservative bankruptcy lawyers have advised clients against co-mingling funds prior to filing bankruptcy. In all honesty, it is good advice. Keeping a clear line of separation between exempt and non-exempt assets helps ensure that your bankruptcy lawyer and the court appointed trustee will find themselves on the same page. That being said, the following excerpt from an Arizona bankruptcy memorandum shows that those advising clients against even cashing their social security check might need to loosen up their belt straps.

The deposit of exempt funds in a bank account does not affect a debtor’s exemption, nor does it change the exempt character of the funds, so long as the source of the exempt funds is reasonably traceable. In re Hanson, 41 B.R. 775 (Bankr. D. N.D. 1984); Matthews v. Lewis, 617 S.W.2d 43 (Ky. 1981). If it is impossible to separate out exempt from nonexempt funds, the rule is that an exemption cannot lie. Foreacre, 358 B.R. at 393 (homestead sale proceeds commingled with nonexempt and exempt funds, transferred to separate accounts, and withdrawn for living expenses over the course of several months lost exempt status as they were no longer “identifiable”); Matter of McCafferty, 81 B.R. 99 (Bankr. M.D. Fla. 1987).

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