Assets Purchased with Exempt Social Security Benefits Are Not Themselves Exempt

Personal property is not exempt even if it was purchased with Social Security benefits that were exempt, according to an opinion by Chief District Judge J. Randall Hall of Augusta, Ga., affirming Bankruptcy Judge Susan D. Barrett.

Using Social Security benefits, the chapter 13 debtor purchased a car for which she claimed an exemption under 42 U.S.C. § 407(a). The sections say:

The right of any person to any future payment [of Social Security benefits] . . . shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.

Because she could trace the purchase of the car to Social Security benefits, the debtor contended that the car was exempt. The trustee objected and prevailed before Bankruptcy Judge Barrett. The debtor appealed.

Judge Hall concluded that the trustee met her initial burden of showing that the exemption was not properly claimed. He said that Section 407(a) “only refers to ‘future payment’ or ‘moneys paid or payable,’ not personal property purchased with social security benefits.”

“Moreover,” Judge Hall said, “read in its entirety, Section 407 does not include any language relating to the traceability of social security benefits.”

Next, Judge Hall looked at whether the debtor had shouldered the burden that had been shifted to her. He said that the authority cited by the debtor actually demonstrated “Congress’ intent to exempt social security payments regardless of whether the right to receive those payments was prepetition or postpetition, not what is purchased with the payments.”

Judge Hall followed a decision from a bankruptcy court in Chicago, which said that “[t]he protection of § 407 does not extend to tangible property purchased with social security proceeds, even if the property is traceable to the proceeds.” In re Franklin, 506 B.R. 765, 776, n.8 (Bankr. C.D. Ill. 2014).

Judge Hall affirmed Judge Barrett and held that Section 407(a) did not exempt the car.

Practice Points

Obviously, advise a prospective debtor against buying a car with Social Security benefits before filing.

If a prospective debtor has income aside from Social Security, the debtor should have two bank accounts, one to hold Social Security benefits and a second for other income. The two should not be comingled to permit traceability of Social Security benefits. The prospective debtor should first spend income from the account that doesn’t have Social Security benefits and use Social Security benefits only when the other account is depleted.