Social Security Offset Can Contribute To Bankruptcy
Posted on December 4th, 2009
Of all the clients who turn to me for Indiana bankruptcy information and those who turn to me as a debt consolidation lawyer, the older ones typically have one good thing going for them, namely their Social Security benefits.
That’s because Federal law makes Social Security benefits exempt from creditors’ claims. That law includes retirement benefits from Social Security as well as disability benefits. What that means is, with the exception of the IRS, even creditors who have legal judgments against a debtor cannot 
intercept Social Security payments or take that money away from a recipient after it’s been paid.
Typically, when older clients file bankruptcy Chapter 7 in Indiana, I find it’s due to just one or two primary factors. There might be medical costs beyond what is covered by Medicare and supplementary insurance, and that might be the reason older folks seek Indiana bankruptcy help. Parents sometimes have exhausted their own savings helping adult children who have lost jobs or themselves been hit by medical emergencies. Sometimes a child has applied for Social Security disability benefits, but the long, long delays have financially drained both that adult child and his or her parents.
In recent months I’ve been seeing a problem of a different sort with Indiana bankruptcy clients in their early 60′s. This problem comes up with people who, at some point in their careers, worked for the government.
It all comes back to the “Windfall Elimination Provision”, which basically states that, “if you receive a pension from a federal, state, or local government based on work where you did not pay Social Security taxes, the pension you get based on that work may reduce your Social Security benefits.” (The concept is logical: Social Security benefits are based on the worker’s average monthly earnings adjusted for inflation. But since no wages were withheld for Social Security while that person worked for the government, he/she should not collect a government pension and in addition receive the same amount of social security benefits as someone who had had Social Security wages withheld throughout their career.)
A second, related, law is the Government Pension Offset that affects spouses and widows/widowers of someone with a government work history.
Now, both these laws have been around since 1983, so there’s no new news here. The fact is, though, until recently, I had never run up against this situation in any of my four Indiana bankruptcy law offices.
In today’s tough economy, though, what’s happening is that more people are being laid off and claiming Social Security benefits beginning at age 62 (rather than waiting until their “normal retirement age”, which might be age 65 to 67. Based on the statements (you know, those annual statements Social Security sends out to everyone age 50 and up) those people had no way of knowing what the offset was going to be.
And those offsets can be a nasty surprise indeed. For individuals with overdue medical bills for whom the layoff put an end to their plans to work for three to five more years, receiving a greatly reduced Social Security benefit can be financially devastating.
It’s interesting that at the same time as I was beginning to see clients experiencing a problem with their social security benefits being so much smaller than expected, the Journal of Financial Planning (in order to offer the most up-to-date legal advice about debt consolidation and bankruptcy to my clients, I read professional journals in employee benefits, taxation, and financial planning) ran an article on that very topic. Authors Joseph McCormack and Grady Perdue, professors at the University of Houston-Clear Lake noted that “the people hurt most by the GPO are generally workers that are receiving very small pensions.”
In a book I reviewed in a previous blog post, Elizabeth Warren asks who the people are who are in so much financial trouble. Well, were you to ask the same question of Mark Zuckerberg, based on my long career as a bankruptcy lawyer in Indianapolis and around central Indiana, you’d get the same answer. That answer really applies to people in their sixties caught by surprise by the reduction in their Social Security benefits they need for basic support:
“…ordinary, middle class people…”
Similar Posts:
- Put Benefits Back, Orders Court in Visteon Bankruptcy Case
- Pensions debt may impact workers` retirement funds
- Debt Conolidation Lawyer Helps When Unemployment and Disability Deal a Double Whammy
- Why Municipal Bond Investors Think About Bankruptcy
- Indiana Bankruptcy Becomes Par For The Course At Legends
Filed under Bankruptcy Help Articles |