With so many people in a state of financial desperation, the long awaited third federal stimulus is now being rolled out just in time for many.
However, you might be wondering if your stimulus counts as income for bankruptcy.
Under the CARES Act, your stimulus check is exempt and will not be counted as income in your bankruptcy case.
However, things can become murky now that three stimulus payments have been issued in the last year, so we will explore what you need to know about your stimulus payments and bankruptcy.
Are Stimulus Payments Exempt?
Yes, your stimulus is considered exempt but once it is deposited into your checking account, things get complicated because it is then considered an ‘asset’ so is factored into your bankruptcy case.
Understanding the ‘Wild Card Exemption’
Some states have what they call a ‘wild card exemption’. Basically, the term means that you can have up to $12,500 in assets per spouse which remains exempt in a bankruptcy.
You can only use this exemption if you are not also claiming your residence as an exemption.
Chapter 13 Bankruptcy and Your Stimulus Check
If this happens then you are told to turn over the extra assets to the Trustee and the money is given to your creditors.
Can the Bankruptcy Trustee Take My Stimulus Check?
Contained with the extremely expansive 5,600-page Consolidated Appropriation Act (CCA), Pub. L. No. 116-260 (Dec. 27, 2020), are several new protections for those filing bankruptcy. Within the Bankruptcy Code § 541(b)(11) is a list of specific exclusions from property.
It says, “recovery rebates made under section 6428 of the Internal Revenue Code of 1986” are not property of the estate.
It refers to the fact that the money obtained in the stimulus will not because of concern and that you can still file bankruptcy.
This protects the stimulus payments as long as Congress authorizes them with the exact same Internal Revenue Code provision, and they are considered an advanced tax refund.
With the last stimulus check issued in March, things were taken a step further and they were declared completely off limits to trustees.
The U.S.Trustee’s Office has given notice to Chapter 7 and Chapter 13 Trustees that it does not want the Trustees to take the federal stimulus funds from individuals filing for bankruptcy.
Trustees are being told to notify the U.S. Trustee’s Office prior to seizing any stimulus checks.
Can I Pay Off My Trustee Quicker for Chapter 13?
Individuals who are going through a Chapter 13 bankruptcy might want to pay off their repayment plan early using stimulus money, but you probably won’t be let out of the plan.
In fact, your monthly payments will likely increase because your creditors can get your discretionary income for the three to five year repayment period.
Can Creditors Take My Stimulus Check?
Anyone who does not receive their stimulus check can claim it when they file their Recovery Rebate Credits on their federal taxes.
However, if you owe certain debts such as child support or back taxes then the amount may be reduced.
Only the first CARES Act was drafted so that it was exempt from state or federal garnishment (except child support).
The second round of COVID relief in December was fully protected from garnishment from all creditors. That being said, please remember that tax refunds are different so if you had to claim the stimulus on your taxes then the amount might be reduced.
If you are struggling financially then it could be in your best interest to pay off high interest credit cards and loans using the stimulus money after taking care of your immediate needs.