As part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act) which President Trump signed into law on March 27, 2020, Maryland citizens may receive a $1,200.00 check or more from the Federal government. If you are in a Chapter 7 or Chapter 13 bankruptcy, should you be worried that you will have to pay these much-needed funds to your creditors?
How the Stimulus Checks Work
There is a lot of misinformation on exactly how the stimulus checks work, and we hope to clear this up. First, if an eligible individual filed a single 2018 tax return, the individual would receive $1,200.00, and $2,400.00 if a tax return was filed jointly. Additionally, for each of any qualifying children, an amount of $500.00 per qualifying child would be sent out. For a joint return, if the adjusted gross income of the filers exceeds $150,000.00, the stimulus amount is reduced by 5% for amounts over $150,000.00. If a person filed as head of household, any amounts over $112,500.00 would be reduced by 5%, and for everyone else, any amounts over $75,000.00 would be reduced by 5%. The stimulus checks are to be sent to Americans “as rapidly as possible.”
How the CARES Act Protects Stimulus Checks in Chapter 7
The CARES Act addresses the treatment of stimulus checks in Chapter 7 bankruptcy when it comes to the Means Test. In Chapter 7, the Means Test looks at all sources of income during the six (6) months prior to the filing of the bankruptcy, and compares that amount to the median income for the household size in the State in which the bankruptcy case was filed. If the current monthly income over the past 6 months before the filing of the bankruptcy case is over the median income, a presumption of abuse of the Chapter 7 bankruptcy process arises, which either means that the debtor must file under Chapter 13 or pass the Means Test.
When it comes to the stimulus checks, the CARES Act specifically excludes these funds from the definition of “Current Monthly Income,” which means that for purposes of the Means Test, the income derived from stimulus checks is not to be considered. This applies to cases filed before, on, or after the enactment of the CARES Act on March 27, 2020.
The CARES Act does not address whether the stimulus check payments are considered an asset of the bankruptcy estate that must be exempted. However, because the stimulus checks will likely be used for normal household expenses such as mortgage, rent, car payments, food and housekeeping, etc., there is little likelihood that in Maryland any remaining such funds would not be able to be protected through an already existing Maryland exemption.
How the CARES Act Protects Stimulus Checks in Chapter 13
In Chapter 13 bankruptcy, the debtor proposes a 3 to 5-year payment plan to pay back some or all of the debtor’s liabilities. The Chapter 13 plan payment must include all the debtor’s “disposable income.” The CARES Act protects the stimulus funds from being included in a Chapter 13 plan payment by excluding the funds received under the CARES Act from the definition of “disposable income.” This provision also applies to cases filed before, on, or after the enactment of the CARES Act on March 27, 2020.
How the CARES Act Helps People in a Confirmed Chapter 13 Plan
If a debtor is in a confirmed Chapter 13 plan, the Court has signed an order confirming the debtor’s Chapter 13 payment plan, and the plan can only be modified as provided for in the Bankruptcy Code. What happens if a debtor’s hours are reduced at work, or if a debtor becomes unemployed as a result of COVID-19?
The CARES Act answers this question in a few ways. First, it allows a debtor to modify a confirmed Chapter 13 plan if “the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID–19) pandemic.” This broadly drafted provision is meant to encompass many scenarios that could result in a financial hardship. The Court can approve a modified plan due to a COVID-19 financial hardship after notice and a hearing.
The CARES Act also goes a step further. Normally, a Chapter 13 payment cannot last longer than 5 years. However, the CARES Act allows a debtor in a confirmed Chapter 13 plan to modify the Chapter 13 plan to 7 years. Having an extended payment period can allow monthly payments to be reduced to alleviate some of the financial hardship caused by COVID-19.
The COVID-19 disaster continues to affect Maryland citizens, and the CARES Act provide some relief to Maryland families. If you have questions about bankruptcy as a result of the COVID-19 disaster, please call Steiner Law Group at (410) 670-7060.