Can Bankruptcy Take Your Stimulus Check?

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law by President Trump on March 27, 2020. The CARES Act is designed to provide fast and direct economic assistance for American workers, families and small business, as well as preserve jobs for American companies.

Through Economic Impact Payments and other means, the United States Treasury Department is working to ensure Americans are seeing direct and fast relief in the wake of the COVID-19 pandemic.

The CARES Act provides for payments to American households of up to $1,200 per adult for individuals whose income was less than $99,000 (or less than $198,000 for joint income tax filers) and $500 per child under 17 years old. For a family of four, that adds up to $3,400 per household.

The CARES Act is designed to help Americans cope with any economic impact caused by a job loss, temporary layoffs, loss of income, or other factors. But how does bankruptcy figure into the stimulus payment picture?

Questions Regarding Stimulus Payments and Bankruptcy

Some clients have expressed concern that their stimulus payments could hurt them in the long run, should they file for bankruptcy. In a chapter 7 bankruptcy, a debtor’s nonexempt assets are sold to pay back creditors; in a chapter 13 bankruptcy, debtor’s enroll in a plan to repay all or part of their debt. In any bankruptcy filing scenario, the debtors much income information about their assets as well as monthly income.

Two questions have arisen, as noted by the Justice Department:

• Should the stimulus payments be included in the calculation of currently monthly income or projected disposable income
• Are the stimulus payments property of the bankruptcy estate.

Stimulus Payments Are Excluded

The CARES Act explicitly excludes COVID-19 stimulus payments from the statutory definitions of currently monthly income and disposable income. Stimulus payments received within six months before filing of the bankruptcy petition will not be included from disposable income available in a chapter 13 plan.

Stimulus Payments Are Included as Part of the Bankruptcy Estate

According to the Justice Department notice cited above, the stimulus payment becomes part of the bankruptcy estate only for cases filed after the date of the CARES Act, March 27, 2020. The United States Trustee expects that it is “highly unlikely that the trustee would administer the payment after consideration of all relevant circumstances.” The notice says that because of the “modest” amount of the stimulus payment, and the fact that many debtors would likely litigate to exclude it from their estate, that it’s unlikely the Trustee would insist on including the stimulus payment as an asset in the bankruptcy estate.

Tax Debt and the Stimulus Payments

As many debtors also owe back taxes as part of their bankruptcy case, we thought it important to also cover this question. If you owe money on your taxes or are in a payment plan (including chapter 13), the federal government cannot take your stimulus payment to pay your tax debt.

Don’t forget the IRS extended the filing date for 2019 taxes to July 15 instead of April 15. If you owe taxes for 2019, that means you can essentially use the stimulus money for more immediate needs, such as rent or food, rather than worry about paying your tax bill. Then try to use the extra time to come up with an alternative source to pay your 2019 tax bill.

Effects of the Stimulus Payments on Defaulted Student Loans

Since many debtors often have unpaid students loans, another question that has come up: Can Debtors be forced to use their stimulus money to repay student loans?

The short answer is, NO.

In Chapter 13 bankruptcy, student loans are treated as nonpriority unsecured debts just like credit cards and medical bills, and would be included as part of the payment plan.

In a chapter 7 bankruptcy case, student loan debt usually cannot be discharged as part of a bankruptcy case.

Fortunately, the CARES Act suspended payments on student loans, with zero percent interest and no penalties, until Sept. 30, 2020. So if you decide to skip those student loan payments to help ease the effect of the COVID-19 pandemic, you will suffer no penalty. And, the U.S. Department of Education has said they will not force student loans into default during this period.

Have Questions About Bankruptcy?

If you have additional questions about the effects of the federal government’s stimulus payments on your bankruptcy case, please contact The Law Office of David A. Bhaerman. You can schedule a call using our convenient online scheduling form on this page, or just pick up your phone and contact the Pickerington office directly at (614) 834-7110 in the Columbus area, or call (740) 689-1372 in Lancaster Ohio and surrounding areas.