## Facts

- The Social Security Administration determined Todd Carpenter was disabled and later issued him a $17,165 lump-sum payment for retroactive disability benefits.
- Carpenter deposited the payment into a bank account and kept the funds segregated.
- Shortly before filing bankruptcy, Carpenter converted the funds into a cashier’s check while retaining possession of the proceeds.
- Carpenter filed a Chapter 7 petition while still holding the cashier’s check.
- The Chapter 7 trustee objected, asserting the paid benefits became estate property under 11 U.S.C. § 541(a).
- Carpenter argued the funds were protected from bankruptcy administration by 42 U.S.C. § 407 and, alternatively, by the Social Security exemption in 11 U.S.C. § 522(d)(10)(A).
- The bankruptcy court ruled for the trustee; the Bankruptcy Appellate Panel reversed; the trustee appealed to the Eighth Circuit.

## Issues

1. Whether a debtor’s prepetition lump-sum payment of past-due Social Security disability benefits, kept segregated and traceable, is excluded from the bankruptcy estate by 42 U.S.C. § 407.
2. Whether Social Security benefits must be treated only as exempt property under 11 U.S.C. § 522, or whether § 407 prevents such benefits from becoming property of the estate in the first instance.

## Decision

- The Eighth Circuit affirmed the Bankruptcy Appellate Panel and reversed the bankruptcy court.
- The court held the lump-sum Social Security disability payment was excluded from the Chapter 7 estate by 42 U.S.C. § 407.
- Because the funds were excluded, the debtor did not need to rely on Bankruptcy Code exemptions to protect them.
- The case was remanded for proceedings consistent with the exclusion of the funds from the estate.

## Legal Principles

- 42 U.S.C. § 407(a) shields Social Security “moneys paid” from “the operation of any bankruptcy or insolvency law.”
- Under 42 U.S.C. § 407(b), no other statute may be construed to limit § 407 absent an express reference to § 407; Bankruptcy Code provisions lacking such a reference cannot diminish § 407’s protection.
- The Bankruptcy Code’s broad estate definition in 11 U.S.C. § 541(a) is subject to external federal statutory limits that can exclude specific interests from the estate.
- A debtor’s election among exemption schemes under 11 U.S.C. § 522 does not control the threshold question whether an asset is estate property when a separate federal statute excludes it.
- Paid Social Security benefits can remain protected “moneys paid” after deposit or conversion into another cash-equivalent form when the proceeds are segregated and traceable rather than commingled.

## Conclusion

The Eighth Circuit held that segregated, traceable lump-sum Social Security disability back-pay received before a Chapter 7 filing does not become property of the bankruptcy estate because 42 U.S.C. § 407 bars such funds from bankruptcy administration, independent of the Bankruptcy Code’s exemption framework.


Carpenter v. Ries (In re Carpenter), 614 F.3d 930 (8th Cir. 2010)