Your stimulus check is generally protected. The Coronavirus Aid, Relief, and Economic Security (CARES) Act states that when you file and calculate the means test, the stimulus check is not a part of the income trustees can use as disposable income to prevent you from filing bankruptcy as a Chapter 7.
Stimulus checks are not a part of the means test income. The Bankruptcy trustee program does not directly take a stimulus check from debtors who filed for bankruptcy. It is possible to lose the funds indirectly.
This article will focus on how bankruptcy takes stimulus checks, how you can protect stimulus payments and your responsibility in bankruptcy.
Stimulus Payments in Bank Accounts
A problem does exist when you convert the stimulus check into a bank deposit or asset. Some states have very small exemptions for money in a bank account.
Indiana, for instance, only allows a debtor to have about 300 dollars in their bank account at the moment of filing. Put 3000 dollars into a bank account and file for bankruptcy, and the bankruptcy trustee will take 2700. The exemption is only 300.
Buying Property Before Filing Bankruptcy
The same thing happens when stimulus payments are used to buy a car which has too much equity. If you cannot exempt the auto, bankruptcy trustees can take the car or any non-exempt item.
You think of a stimulus payment as a welfare check. The bankruptcy estate is any asset the trustee can use to benefit creditors. Exemptions allow you to keep some of that property, but if you exceed the exemptions, you can lose the property you need to save.
How Do You Protect Stimulus Payments or Welfare Payments
Stimulus payments, social security, and welfare are generally not attachable by bankruptcy trustees and creditors. They don’t lose that protection if the checks are in a separate account.
Bankruptcy and Mixed Assets
As soon as you mix stimulus money or social security checks in with other deposits from a full-time or part-time job, they lose that protection. If you receive government benefits, they should be the sole source of deposits in an account.
Earned income should go into another account. A credit card debt collector can attach a tax refund, stimulus check, or social security check if it is intermingled with other money and funds.
Chapter 7 and Stimulus Money
In Chapter 7, a bankruptcy estate includes all of your possessions. A Chapter 7 trustee is paid from the money he turns over to the creditors, plus about 60 dollars for reviewing the petition.
The CARES Act does not exclude stimulus checks or recovery rebates from being “property of the estate.” It is acceptable to take any stimulus checks or recovery rebates and pay them to creditors. But just because he has the right to do it does not mean it is right. Most will abandon the asset.
The U.S. Trustee Program Directive
The U.S.T. program has asked trustees not to seize the $600 stimulus payment because the stimulus funds were for the purpose of spending and stimulating the economy. The bankruptcy process could defeat the purpose of the American rescue plan act if the recovery rebate were part of a debtor’s repayment plan.
How to Protect Stimulus Checks When You File Bankruptcy
Paying unsecured debt does not help the personal situation of eligible married couples who depend on tax credits and the tax return. The fresh start the internal revenue code is trying to give through recovery rebates was not given a specific exemption so it could be protected.
But the law meant it to pay for essentials. Filing bankruptcy should not take a recovery rebate or welfare from essential items to pay the debt.
Spending an Asset Before Filing Bankruptcy
However, to ensure Trustees can not get an asset, the law allows a couple to spend the asset, so Chapter 13 or Chapter 7 does not take it. There is also a wildcard exemption and household exemption which should cover stimulus funds.
You can convert a non-exempted asset like 13,000 in cash by buying 13,000 in furniture, which is perhaps only worth about 3,000 as used furniture after you buy it. The furniture you can keep as household goods has a 17,000 limit. Recently purchased clothes or furniture may benefit you, but it has little or no resale value. If your wife wants shoes and dresses or a new refrigerator, now is the time. If you use up exemptions and have $5,000 too much, think back to school, clothes, a new phone, laptop.
Stimulus Payments in 2022
The federal government issued stimulus payments in 2020 and 2021. In 2022 stimulus funds and tax benefits continued to be paid to victims of the pandemic. Every law firm which files bankruptcy cases is a debt relief agency by an act of Congress. We are required as bankruptcy attorneys in our role in the attorney-client relationship to help you retain the items you need for a fresh start. This includes your tax refund in any bankruptcy case.
Your Duty in Bankruptcy
Your first responsibility is to ensure you have the items you need to start over with a budget that provides for you and your dependents. . These assets belong to you and your dependents, not your debt. An attorney who knows the law can help you keep essential items, including stimulus money, instead of applying it to your debt.
After that comes a duty to repay debt.
A bankruptcy attorney will know the bankruptcy law and how to keep your tax refund. A substantial amount of information is on our website on how a bankruptcy should be filed. Our website breaks this down into 4 simple steps: gathering the documents, taking the required class, filling out the intake and preparing your bankruptcy with an attorney. We have created this website and a manual for you.
Instead of hiring an attorney based on attorney advertising, hire him based on his ability.
Contact Us for a Free Consultation!
We have a free consultation for anyone who needs advice on a foreclosure or bankruptcy. Worrying over your tax refund or stimulus checks should not keep you from filing for bankruptcy if you need to. Your stimulus checks or social security is part of the disposable income you need for the bankruptcy to work. It does not belong to the Chapter 13 trustees or belongs to a repayment plan for debt.
Resources for Bankruptcy
If you are considering bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.