June 16, 2019

How are Auxiliary Benefits Treated When Custodial Parent Files Bankruptcy?

I received the following question from a reader of this blog that raises several interesting questions about auxiliary benefits and the bankruptcy process.

Your blog is the most helpful I have found on the web so far.  God Bless You!

I have just been notified that my ex will be receiving SSDI, so in turn my son qualifies for benefits.  I was told his benefits would be backdated to June 2010 so I should receive a lump sum.  My question is since this is my son’s benefits, do I have to pay taxes on what he receives?  I was going put it in his (my sons bank account for college).  AND I was about to file BK (From the divorce) so could that be seized in the Ch 7 as assets?

Here are my thoughts, which represent general information about Social Security auxiliary benefits and the bankruptcy process:  I believe that the auxiliary benefits payable to your son represents his money, not yours.  You may be the payee for those funds, but the money is not yours.  I would talk to your bank about how to set up the bank account correctly – it should be clear that the account is owned by him with you as the trustee of the account.

As far as taxes go, you need to speak to your tax preparer.  Social Security payments can be taxable based on household income, so the answer to that question will depend on your personal financial situation.

The bankruptcy issue can get confusing because of how Social Security money is treated under the bankruptcy laws.  I don’t believe that your son’s lump sum money would be reachable by a Chapter 7 trustee since it is not your money, especially if the account holds only funds relating to the Social Security benefits.  The monthly benefits would not count for purposes of calculating your current monthly income under the median income test.  However, the monthly benefits would be considered in your Chapter 7 budget since your son is part of your household.  Confused?  Thank Congress for the byzantine nature of these laws.

I would talk to your bankruptcy lawyer about these issues, preferably before you set up the bank account.  Even though bankruptcy is a federal procedure, the exemption laws, which control what you can shelter, vary from State to State.   Your bankruptcy lawyer can confirm the accuracy of my general observations and offer legal advice specific to your situation.

Finally, thanks for the kind words about my blog.  Flattery is sincerely appreciated!



About

Jonathan Ginsberg practices Social Security disability law in Atlanta, Georgia.  He represents clients in claims before the Social Security Administration.

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