In many ways, 2020 was an incredibly difficult year because of the COVID-19 pandemic. One of the most ubiquitous struggles people faced was finding ways to make ends meet when lockdown orders affected their ability to earn income.
Stimulus Payments in 2020 and 2021
The federal government issued two stimulus payments – $1,200 and $600 – in April 2020 and January 2021 to Americans who qualified for the aid. A third stimulus check of $1,400 was included in another COVID-19 relief bill signed into law by President Joe Biden on March 11.
If you were financially impacted by the pandemic, you want to fully benefit from your stimulus checks and tax refund this year. This can be an especially important concern if you are considering bankruptcy to help relieve you of your debt burden.
Read more below to find out how bankruptcy can affect stimulus checks and tax refunds.
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You Will Probably Keep Your Stimulus Money in Bankruptcy
If you received or expect to receive a COVID-19 stimulus payment, it most likely will not be seized in bankruptcy.
There are two reasons why this is possible:
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act prevents bankruptcy trustees from including stimulus money in calculations for a filer’s monthly income and disposable income.
- The U.S. Trustee Program issued a notice stating that it does not expect Chapter 7 or Chapter 13 trustees to recover federal stimulus money from any filer.
That second point is important. There is a bit of gray area in Chapter 7 cases that makes recovering stimulus money possible.
Chapter 7 and Stimulus Money
In Chapter 7, a bankruptcy estate is created and managed by a trustee. This trustee will facilitate collection from the filer and payment to creditors.
The CARES Act does not state whether or not stimulus payments are excluded from consideration as “property of the estate." This leaves it open as to whether or not Chapter 7 filers can lose their stimulus checks.
The notice from the U.S. Trustee Program recognizes this, though, and it is effectively asking all trustees to back down from seizing stimulus money as property belonging to a Chapter 7 bankruptcy estate.
In addition to this quasi-directive, there doesn’t appear to be much will on behalf of trustees to collect these payments anyway. This is likely due to the fact that:
- The stimulus money is modest compared to filers’ debts
- A non-debtor spouse may have an interest in receiving the money
- Recovering the assets is unlikely to provide creditors with a meaningful distribution
How Bankruptcy Can Affect Your Tax Refund
Can the IRS take my tax refund if I filed Chapter 13?
California taxpayers typically get bigger refunds. Therefore, it's understandable to be concerned about it dissolving in bankruptcy. While it’s possible to protect your tax refund in bankruptcy, there’s no guarantee. In Chapters 7 and 13, your tax refund is considered an asset whether you’re expecting or have already received it.
Ultimately, keeping your tax refund in bankruptcy can rely on which type of bankruptcy you file and the timing of your bankruptcy petition.
Chapter 7 Exemptions & Tax Refunds
If you’re filing for Chapter 7, it’s time to consider what you can exempt from bankruptcy. California provides two lists of exemptions known as 703 Exemptions and 704 Exemptions, although neither explicitly provides an exemption for a tax refund.
The 703 Exemptions series, though, has a generous exemption for “wildcard” assets. These can be anything that a debtor wants to protect in bankruptcy. This can include a tax refund, although only as much as $1,350 because this is the extent of the wildcard exemption.
If you own any equity in a home, you will likely select the 704 Exemptions series. Thanks to AB-1885, which went into effect in January this year, the amount of the homestead exemption for a principal residence was dramatically raised.
The new homestead exemption is calculated in one of three ways:
- If your home is in a county where the median sale price for a single-family home in the year prior was is $600,000 or more, your exemption caps at $600,000.
- If your home is in a county where the median sale price for a single-family home in the year prior was $300,000 or less, your exemption caps at $300,000.
- If your county’s median sale price fell between $300,000 and $600,000, then your homestead exemption caps at that amount.
You may also be able to protect your tax refund when you select the 704 Exemptions series if your timing is right. Tax refunds, when deposited into a bank account before filing for bankruptcy, can be exempted from inclusion in one’s bankruptcy estate.
Losing Your Tax Refund in Chapter 13
Chapter 13 filers, unfortunately, are more than likely going to lose their tax refunds. This is because they are engaged in a repayment plan with their creditors that lasts three to five years. Creditors are prioritized in Chapter 13, and as a consequence, it’s possible that certain creditors will only receive some repayment.
How much those creditors can get is often a factor of how much disposable income you have. Because a tax refund isn’t taken into consideration when weighing your monthly expenses against your monthly income, it is considered disposable income. That means the bankruptcy trustee is likely to seize and use your tax refund to pay off your creditors.
It’s possible to exempt your tax refund by designing a repayment plan that repays all of your debt. When you can afford the monthly payments and satisfy all debt within three to five years, there will be no need to seize your tax refund.
You can also ask for your tax refund to be excused from consideration in your Chapter 13 repayment plan. However, don’t expect this to occur unless you have an expensive emergency and your tax refund can prevent you from sliding into further debt.
Learn More About Your Stimulus Check and Bankruptcy
If you are considering bankruptcy, you probably have a ton of questions about what to expect. You may be concerned if you received federal stimulus money in the last 12 months and/or are expecting a tax refund in a few weeks.
At Nguyen Law Group, we’re here to provide the legal support you need for any bankruptcy-related matter. Our advice and services have helped many clients resolve their problems with debt and take a step toward achieving financial independence again. If you would like to learn more about what we can do for you, schedule a consultation with our attorney.
