Since Social Security benefits are exempt property, must an individual debtor in Subchapter V of chapter 11 report Social Security income on monthly operating reports?

The answer is “yes,” according to Bankruptcy Judge Robert H. Jacobvitz of Albuquerque, N.M.

The Subchapter V debtor was an individual who owned rental properties. She also had about $1,400 a month in Social Security benefits. On her monthly operating reports, the debtor reported her rental income but did not list her Social Security benefits, contending that monthly reporting was not required because the benefits were exempt property.

Judge Jacobvitz disagreed in his January 3 opinion. 

Addressing the merits, Judge Jacobvitz cited 42 U.S.C. § 407(a), which provides that “none” of someone’s Social Security benefits “shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.” He went on to say that the benefits do not lose their exempt status when deposited into a bank account.

Despite the exemption, Judge Jacobvitz cited the Ninth Circuit Bankruptcy Appellate Panel for having held that Social Security benefits must be scheduled in a chapter 7 case.

In an individual’s Subchapter V case, Judge Jacobvitz said that “earnings from the debtor’s services performed post-petition do not become property of the bankruptcy estate.” Similarly, he said that “an individual debtor [is not] required to contribute social security income to fund a subchapter V plan, although an individual debtor may choose to make plan payments with social security income.”

“Even so,” Judge Jacbovitz said, “an individual subchapter V debtor must include in the monthly operating reports exempt post-petition social security income, as well as earnings from the debtor’s services performed post-petition, even though neither is property of the estate.”

Judge Jacobvitz said that his conclusion about disclosure was “made clear by the plain meaning of § 308,” which requires small business debtors to file “periodic financial” reports disclosing “actual cash receipts,” with comparisons of projected to actual receipts and disbursements.

Judge Jacobvitz said that “Section 308(b) does not differentiate earnings and cash receipts that are not property of the estate from those that are estate property.” He therefore held that “§ 308 requires an individual subchapter V debtor with social security income to report such income in the monthly operating reports and attach copies of supporting bank account statements to document both receipts and disbursements of such income.”

At the end of his opinion, Judge Jacobvitz explained why reporting of Social Security income was integral to the Subchapter V process. The reports, he said, “give a complete and accurate picture of a debtor’s ongoing post-petition financial situation, which will impact the feasibility of a subchapter V plan of reorganization.”

Judge Jacobvitz directed the debtor to report her Social Security income on monthly operating reports and to attach copies of bank account statements into which the benefits were deposited.