Bankruptcy Helps Protect Your Stimulus Payment
People who are overwhelmed by debt during the COVID-19 outbreak may want to consider filing bankruptcy but are concerned about whether filing will have an effect on their stimulus check. This is especially pertinent now as there is serious discussion in Congress about approving a second round of stimulus payments. We have some answers if you’re asking these questions.
If I File for Bankruptcy, Will I be Eligible for a Stimulus Payment?
Yes. There’s nothing in the current or proposed legislation that would disqualify persons who file for bankruptcy from receiving a stimulus payment.
Will My Stimulus Check Be Taken in the Bankruptcy?
It’s possible but very unlikely. According to a notice from the Justice Department, all Chapter 7 and Chapter 13 Trustees are limited in terms of what they can do with the stimulus payments. A stimulus check won’t be considered while calculating monthly income, and won’t be used in the calculation of disposable income that can be paid to creditors. This means receiving a stimulus payment won’t force an individual to repay a higher amount in bankruptcy than they would have if they hadn’t received it.
You may be able to apply a cash exemption, a public assistance exemption, or a wildcard exemption to the stimulus payment. If no exemption covers the payment, however, or if you use applicable exemptions for other assets, you probably will need to relinquish the payment.
There are rare cases where the stimulus payments might be considered property of the estate, meaning it can be included in the pool of assets designated to repay debt, but the designated Trustee would have to notify the U.S. Trustee prior to taking this action or refusing a chapter 13 repayment plan.
Can My Creditors Access Stimulus Payments?
When you file a bankruptcy case, an automatic federal court injunction (called the “automatic stay”) is issued prohibiting your creditors from starting any new or continuing any existing actions, including lawsuits, to collect on debts that they alleged you owe them prior the date you filed your bankruptcy petition. This applies to mortgage lenders, landlords, credit card collection companies, auto loan lenders, etc.
If a creditor violates the automatic stay by taking money from your bank account, including your stimulus payment, after your case is filed, you can get it back. If the creditor refuses to cooperate, they can be subject to penalties in the bankruptcy proceeding.
The enabling law for the stimulus payments does not protect stimulus checks from seizure by creditors or debt collectors outside of a bankruptcy. If the funds have been placed in a bank account, a creditor or debt collector may be able to seize them through a levy or garnishment before the debtor withdraws them. Thus, some debtors may choose to promptly withdraw their stimulus check funds from their bank accounts to cover essential expenses and record the items for which they used them. Note that a handful of states have instituted protections that prohibit debtors from seizing stimulus checks.
Recipients of Social Security benefits may be able to protect their stimulus checks if the IRS places them in accounts dedicated to Social Security benefits. These accounts are generally shielded from collection efforts.
When a Levy Happens
Certain types of debt expose a debtor to a levy or garnishment of their bank account without prior court action. Common examples include tax liens, student loans, and debt owed to the financial institution that holds the account. Other types of debt, such as credit card debt, rent, and medical debt, cannot result in a levy or garnishment unless the creditor sues and receives a money judgment against the debtor. If you are not sure whether you have a money judgment against you, you can check court records and credit reports. If you find an old judgment against you, it may no longer be enforceable unless the creditor has renewed it.
Sometimes a creditor might fail to comply with the statute of limitations in suing to collect a debt. This means that the creditor took too long to sue under the laws in your state. You can ask the court to dismiss the case if the creditor violated the statute of limitations.
If a creditor has already seized your stimulus check through a levy on your bank account, you can potentially object to the levy. This requires prompt action, since most states require a debtor to object within 10 days or even sooner. An objection might claim an undue hardship or argue that state law exempts the funds that were levied from collection efforts.
We understand the stress and sleepless nights that arise from difficult financial times. Our bankruptcy attorneys are ready to get you some relief and back on the path to good credit. FLG Bankruptcy Attorney: Matthew Bole, Esquire