If the government were to mail out free money, who should get first dibs on it — the recipient or his creditors?
What would seem to be an inane question in normal times has become a live issue in the spring of 2020. To fight the massive economic repercussions of the corona virus shutdown, the federal government is indeed mailing free money to just about every household — in the form of stimulus checks to be mailed or sent electronically by the IRS. The default amount for a single adult is $1,200.00. Children under 17 get $500.00. American with higher incomes over $70,000.00 per year will get a reduced amount or nothing.
But what if the recipient has filed a bankruptcy case? Who gets the stimulus then?
Thankfully, the legislation that allows for the massive bailout addresses the problem — at least partially.
CARES Act stimulus payments will not count as income in bankruptcy court. The act contains specific provisions that exclude these payments from the bankruptcy definition of income. That means that the payments don’t have to be counted in the bankruptcy means test, which in turn means that no one will be excluded from filing bankruptcy — even under Chapter 7 — on account of the.
Stimulus payments are also excluded from the calculation of “projected income,” which is important to debtors in Chapter 13. Usually these debtors have to pay at least as much as their projected income calculation says in monthly plan payments to a trustee. No one’s plan payments are going to rise because of CARES Act stimulus payments.
That’s the good news. But what about assets? Leaving aside the concept of income, the CARES Act is silent about whether the payments, either anticipated or once received, are assets that need to be reported.
Here the bankruptcy concept of “property of the estate.” comes into play. Filing a bankruptcy case under any chapter creates an “estate,” just like a will does. Typically, all of a debtor’s property is turned in to “property of the estate” as soon as case is filed under the bankruptcy code. There are a few exceptions, created by the bankruptcy code itself in section 541, such as most contributions to an IRA account, and a few more created by case law, such as a 401(k) retirement account.
Property of the estate
With the CARES Act silent on the issue, stimulus checks, although excluded from the definition of income, become property of the estate in a Chapter 13 case due to code section 1306, which specifically includes after-acquired goods in the debtor’s estate.
Does this mean debtors in bankruptcy will lose their stimulus payments anyway? Probably not. First, there appears to be no barrier to declaring the stimulus funds exempt from attachment using either federal or state wild card exemptions. Some states also provide generous state exemptions for public assistance benefits (for example in Massachusetts, MGL c. 235 s. 34(15).
Finally, as of this writing, there appears to be no will on the part of bankruptcy trustees to go after these payments in a determined way. In fact, a memo from the US Trustees Office restricts case trustees from doing so without explicit authority from the central office.
The bottom line is that stimulus payments, expected or already received, should be no barrier to a new or existing bankruptcy case under any chapter.