If I File Bankruptcy Will I Lose My COVID-19 Stimulus Money?
Published On: April 18, 2020
When someone files for bankruptcy they can keep certain things that are “exempt”.
Stay with me as I explain this process.
Every state has a list of items that a creditor cannot seize. Those items are referred to as “exempt property“. This protection is the same for everyone in that state, even if they file for bankruptcy protection. There are also federal exemptions that protect certain property, such as Social Security, VA income, and more.
Congress failed to protect the COVID-19 Stimulus/Rebate money from creditors.
When Congress passed the CARES Act (March 27, 2020), they were smart enough to protect the stimulus/rebate funds from state and federal government debt collection, but they completely forgot about all the other debt collectors (banks, credit cards, personal loans, bank overdrafts, etc.). Congress intended to give those with low to middle income some additional money, to boost our economy. Unfortunately, if you have an overdraft in the same bank where your stimulus funds are deposited, there is a good chance your bank will take the money. Or, if a creditor or collection company has a judgment against you they have the right to garnish bank accounts and wages (depending on the exemption laws of your state).
Bankruptcy and exemption laws.
Earlier, I mentioned that every adult has a right to protect certain “exempt property”, which includes someone filing for bankruptcy protection. In filing for bankruptcy, that person must determine whether they are required to use state or federal exemptions or a combination of both to protect their property (please don’t try to do this on your own – hire a very good bankruptcy attorney). For instance, if someone lived in Arizona for more than two years and files for bankruptcy protection they will use Arizona exemptions. Arizona laws protect income from welfare, unemployment, child support, and alimony, but not income from child care credit or earned income credit. Federal exemptions protect Social Security, SSDI, VA income, and certain other sources.
When Congress passed the CARES Act, they largely protected the funds from state or federal debt collection. But forgot to protect the COVID-19 funds the same way that federal exemption laws protect Social Security or SSDI. Instead, they left open a huge loophole for debt collectors.
Congress failed to protect the COVID-19 Stimulus/Rebate money from seizure by the bankruptcy trustees.
Since Congress failed to protect the funds from creditors, that also means they failed to protect the funds from a bankruptcy trustee. If someone files for bankruptcy protection and is going to receive the stimulus/rebate monies, the bankruptcy trustee may take those funds (the chapter 7 trustee is paid a percentage, pays his/her attorney, then the few remaining bucks go to the creditors).
Still there? Trust me, we are almost to the answer.
In the world of consumer bankruptcy, there are two types of bankruptcy trustees: Chapter 7 and Chapter 13. The Chapter 13 trustee is an employee of the United States Trustee’s Office, a agency of the Department of Justice. The United States Trustee has authority over their employees and can dictate their actions.
Compare that to chapter 7 trustees, who are independent contractors for the United States Trustee’s Office. That means the chapter 7 trustee can use their own discretion whether to go after certain assets. Some of our Arizona trustees will take a tax refund of $500, while others feel that is out of line and set their limit at $1,500. Some of our trustee attorneys earn almost One Million Dollars a year collecting funds from debtors. My point is that all the chapter 7 trustees have the right to take anything that is not exempt. Under Arizona law the stimulus/rebate monies are NOT EXEMPT.
The report states (according to the CARES Act) that the stimulus/rebate funds are not be to included in calculating the debtor’s income for the prior six months (referred to as the means test).
The question that was not addressed in the CARES Act was whether the creditors have a right to the “recovery rebate”.
For the answer we must address chapter 7 and chapter 13 separately.
Chapter 13 (remember the chapter 13 trustees are employees of the US Trustees Office): for cases filed on or after March 27, 2020, the recovery rebate may be relevant (see § 1325(a)(4)). For cases filed before March 27, 2020, the recovery rebate is excluded from that analysis because it would not have been available in analyzing the reconciliation for payment to creditors in a chapter 7 case. Again, remember that the funds are NOT included in the means test analysis.
Chapter 7 (trustees are independent contractors): In chapter 7 cases, the “property of the estate” issue will only arise in cases filed after March 27, 2020. Regardless of whether the rebate is property of the estate, the United States Trustee expects that it is highly unlikely that the trustee would administer the payment after consideration of all relevant circumstances, including: the modest amount of the recovery rebate; the applicability of state and federal exemptions; any interest of a non-debtor spouse in the recovery rebate; the cost to the estate of recovering and administering the recovery rebate, including litigation with debtors who may seek a judicial determination; and the extent to which recovering the recovery rebate will enable creditors to receive a meaningful distribution.
In both Chapter 13 and Chapter 7 cases: Trustees are directed to notify the United States Trustee prior to taking any action to recover recovery rebates or objecting to a chapter 13 plan based on the treatment of recovery rebates.
Now that you have a brief education in the “legalese” world of bankruptcy and exemptions – what does this all mean?
It means that the United States Trustee is not a fan of any bankruptcy trustee taking someone’s CARES Act stimulus/rebate funds. Is this an absolute prohibition? No, but only time will tell how our more aggressive trustees (Arizona has some of the most aggressive trustees in the Nation) will address this issue.
MUSINGS FROM DIANE:
Every day someone calls “I just have a simple question…..”. The caller goes on to ask their question, but normally I have to explain that there is a lot more information I need before that question can be answered correctly. It is like looking at the tiny tip of an iceberg and assuming that is all there is (how did that go for the folks on the Titanic?)
That same person would never think of calling their doctor and asking a question about a medical situation. Instead, they know the doctor will need blood tests and an x-ray before competently diagnosing the problem.
Whenever there is a new law, like the CARES Act, it takes years to analyze each issue in order to anticipate how someone’s situation will be affected by the the new law and existing laws. Just like doctors guessing at the solution for a new virus – lots of guessing.
By Diane Drain|Published On: April 18th, 2020|Last Updated: May 29th, 2022|
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New Consumer Law Rights Taking Effect in 2023. This NCLC article lists federal and state consumer law rights scheduled to go into effect or expire, during the period from November 17, 2022, through December 31, 2023. Other consumer law changes will be enacted later in 2023 and will go into effect in 2023; this article lists changes whose effective dates have already been scheduled.
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