By: Ronald J. Ellett, Esq.
BANKRUPTCY AND TAX LEVIES ON SOCIAL SECURITY
Under the Bankruptcy Code, Social Security income is expressly excluded from a debtor’s monthly income under 11 U.S.C 109 and the corresponding monthly income calculations for a bankruptcy debtor. Further, Social Security benefits are generally exempt from execution, levy, garnishment and other legal process. However, there are two exceptions to Social Security’s exempt status from collections: (1) levies for the collection of delinquent Federal taxes and (2) garnishment or collection actions brought by an individual to collect a child support or alimony obligation.
The Social Security Act, Section 207, states:
“The right of any person to any future payment under this title shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.”
However, section 6331 of the Internal Revenue Code of 1954 (26 U.S.C. 6331) was enacted into law on August 16, 1954, which was after the enactment of section 207 of the Social Security Acta. It provides at subsection (c):
“Notwithstanding any other law of the United States, no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a).”The property exempt from levy in subsection (a) includes wearing apparel and school books; fuel, provisions, furniture, and personal effects, not to exceed $500 in value; books and tools of a trade, business, or profession, not to exceed $250 in value. Social Security benefits are not specifically exempted from levy by this subsection. Furthermore, as between conflicting treatment of the same matter by two statutes (section 207 of the Social Security Act and section 6334 of the Internal Revenue Code of 1954), the one enacted later (section 6334 of the Internal Revenue Code of 1954) would control with respect to that matter.
Since Section 6334 of the Internal Revenue Code of 1954 does not exempt Social Security benefits from levy, such benefit checks may be levied under section 6331 of the Internal Revenue Code of 1954.In addition, section 6305 of the Internal Revenue Code of 1954 (26 U.S.C. 6305) allows Social Security benefits to be levied for the collection of child support payments.
The bankruptcy code provides for a stay of collections under 11 U.S.C. 362. Further tax debts may be discharged if the taxes were due, including extensions, at least three years before the filing of the bankruptcy petition. Further, the debtor must have filed a tax return for the tax year to be discharged at least two years before filing for bankruptcy. If the taxes were never filed, then they cannot be discharged in bankruptcy. Moreover, tardy returns will only be counted as “filed” under the bankruptcy code if the late filed return was an “honest and reasonable attempt to comply with the tax code.” In re Smith, 828 F.3d 1094 (9th Cir. 2016)
In Smith, the debtor did not file his 2001 taxes on time. Instead, he filed his tax return seven years after it was due, and three years after the IRS assessed a deficiency against him. Smith later filed for bankruptcy and sought to discharge his 2001 tax liability. The bankruptcy court permitted the discharge, but the district court reversed. Id. at 1095. The 9th Circuit focused its inquiry on the honesty and reasonableness of the taxpayer’s conduct, not on any deficiency in the documents’ form or content. The Court held the delay was too long to meet the test of being an “honest and reasonable attempt to comply with the tax code.”
Footnotes:
(1) Pursuant to 11 U.S.C. 109(10A)(B)(ii)(I) The term “current monthly income”—
(ii)excludes—
(I)benefits received under the Social Security Act (42 U.S.C. 301 et seq.);
