There are several protections in bankruptcy, particularly in North Carolina, that allow people to keep their entire settlement from various legal and administrative proceedings. This includes all Social Security benefits, Worker's Compensation, and Personal Injury awards, regardless of the amount. This is because such amounts are meant to help provide for the injured or disabled person for the future and not for their past creditors.
How those funds are held, however, is very important and requires consultation with a bankruptcy attorney. (Especially since Personal Injury, Worker's Comp and Social Security lawyers are not always focused on ensuring that their clients keep their money.)
Often it is necessary to keep this money in a completely separate bank account, including until the completion of a bankruptcy. While maintaining segregated accounts is always cleaner, safer, and for many sources of funds, like a Personal Injury award or Worker's Compensation settlement, mandatory.
Social Security funds do enjoy a bit more liberality, but should be treated with caution.
NCLC:Protecting Social Security and other Federal Benefits in Bank Accounts from Garnishment byDebt Collectors
In some states, the law has been that exempt funds lose their protected status whenever they are deposited into a bank account that contains non-exempt funds. The Treasury Rule applies to the exempt federal benefits whether or not the protected funds have been mixed with other funds. As long as the specified federal benefits were electronically deposited into the account during the two-month period before the garnishment order, they are protected regardless of what other funds might be in the account.
Direct Deposit and Social Security: Not so Nice for Those who Owe : This is fabulous. It makes financial institutions responsible for figuring out which funds are available for garnishment and which are not. Big improvement! But what is it they say? Possession (of a lawyer) is 9/10th of the law? Banks do not always do what they are told. Shocking, I know. They also make mistakes. Again, shocking I know. Most people have no way of fighting back, and as esteemed reader, Wingo Smith notes, there is no private right of action following a mess-up. This is most certainly why Jonathan Ginsberg suggests that benefits recipients have a separate account (marked Social Security, for example) for their benefits, and that they never commingle the funds with other funds.Mess ups are less frequent and far easier to reverse and prove.
NACTT: Direct Deposit Requirement may Create Problems for Debt Laden Social Security Beneficiaries (Password Protected)
Social Security recipients can protect themselves by asking their bank to create a sub-account that holds only SSA issued funds. No money other than SSA funds should ever be deposited into this account. This is especially necessary if the recipient has civil judgment creditors looking for a source of funds to levy against.
When in doubt, file a Ch. 13 instead of a Ch. 7- it's safer and once the question of the exemption has been resolved, particularly if mentioned in a confirmed plan, the debtors can convert to Chapter 7. This Chapter 6 plan (13 minus 7) can charge the debtor less than a full Chapter 13, but a bit more than a straight Ch. 7 and provide a far greater degree of control and assurance. While a Ch. 7 Trustee might be able to relitigate these questions, any appetite to do so is likely much reduced.