The recent CARES Act deadline for excluding pandemic relief payments from Chapter 13 “current monthly income” was extended to March 27, 2022.
Way back in March 2020 the CARES Act made some helpful temporary changes to consumer bankruptcy law. (See our blog post in April 2020 about this.) Some of these changes would have expired, but in the meantime Congress passed two other laws which extended the changes. These are, however, still temporary so it’s important to know the new deadlines. Last week we focused on one change dealing with Chapter 7’s means test. Today we focus on a similar change and new deadline about Chapter 13’s crucial “current monthly income” calculation.
The Crucial Role of Your “Current Monthly Income” in Your Chapter 13 Payment Plan
The Chapter 13 “adjustment of debts” consumer bankruptcy option provides many advantages over Chapter 7 “straight bankruptcy” for many people. Chapter 13 tends to be better for those with tax and child/spousal support debts, vehicle and home mortgage loans, and more than usual or unusual assets. It involves paying into a monthly Chapter 13 plan for the benefit of your creditors. Usually that plan allows you to prioritize paying your more important creditors over the rest of them.
How much you pay into the Chapter 13 plan each month is largely determined by your “disposable income.” The bankruptcy court will generally not approve your plan unless it “provides that all of [your] projected disposable income” is paid into the plan. U.S. Bankruptcy Code Section 1325(b)(1)(B).
Your “disposable income” is largely based on a calculation of your “current monthly income.” Bankruptcy Code Section 1325(b)(2). This in turn is essentially the average of the last 6 previous calendar months of income from virtually all sources. Bankruptcy Code Section 101(10A).
A recent single large unusual payment—such as a $1,400 pandemic relief payment—would artificially increase your “current monthly income.” This would happen if you received that relief payment during the 6 calendar months prior to your Chapter 13 filing. Theoretically you’d have to pay that increased amount throughout the life of your Chapter 13 case. Since the payment plans are usually 3 to 5 years long, that could add up to tremendously more money.
For example, a $1,400 relief payment received in the prior 6 months would be averaged over that 6-month period. So it would increase your “current monthly income” by 1/6th of $1,400, or about $233 extra per month. Over the course of a 3-year plan that would amount to nearly $8,400 extra you’d pay into the plan. Not good.
Why Excluding Pandemic Relief Payments from Current Monthly Income is Important
More to the point, including pandemic relief payments in your “disposable income”/“current monthly income” makes no sense. The point of these calculations is to objectively determine an amount that you could realistically afford to pay to all your creditors. In contrast, including a recently pandemic relief payment in that calculation would skew your plan payment artificially high. It would set your plan up for failure.
The CARES Act’s Solution
Last year’s CARES Act solved this problem by temporarily excluding any pandemic relief money from the definition of “disposable income.” Section 1113(b)(1)(B) of the CARES Act. To be precise, “disposable income” excluded
payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19)
CARES Act, Section 1113(b)(1)(B); Bankruptcy Code Section 1325(b)(2).
All 3 rounds of pandemic relief payments were made under this current ongoing “national emergency.” So none of them count towards your Chapter 13 “disposable income.” At least they don’t for a certain remaining amount of time.
Pandemic Relief Payments Received in the Last 6 Months
This exclusion from “disposable income” is currently most relevant regarding the last two rounds of relief payments. $600 per person/$1,200 per couple/$600 per child payments started going out in early January 2021. IRS News Release, Dec. 29, 2020. $1,400 per person/$2,400 per couple/$1,400 per child payments started going out in mid-March 2021. Third Economic Impact Payments, IRS. As of the writing of this blog post (May 28, 2021), all payments received under these two rounds would currently fall within the 6-month look-back period of the “disposable income” calculation. Excluding these payments enables debtors to avoid paying too much into their Chapter 13 plans.
The CARES Act Change Expired, But Has Been Extended
Under the CARES Act, the provision excluding pandemic relief payments from the means test expired after March 27, 2021. However, just hours before this expiration, Congress passed the COVID-19 Bankruptcy Relief Extension Act of 2021. This brief Act extended this March 27, 2021 deadline by one year. So now this income exclusion of pandemic relief payments applies to Chapter 13 cases filed through March 27, 2022.
Practical Effects of the Extension
Most people will have received all their pandemic relief payments well before 6 months before that new expiration date. The first set of $1,200 CARES Act relief payments started being delivered nearly two years earlier (mid-April 2020). Plus most people have received the other two rounds of payments by now. So this extended provision will affect fewer Chapter 13 filers over time as the new March 27, 2022 deadline approaches.
However, payments get delayed, sometimes for months, for often seemingly minor reasons. For examples see Where’s My Third Stimulus Check? 6 Reasons It Hasn’t Arrived Yet, Forbes Advisor.
Furthermore, even more significant delays can happen for another reason. All three rounds of these relief payments are actually advance payment of tax credits. (“Recovery Rebate Credit.”) People who don’t receive relief payments for which they are eligible can eventually get them as federal tax credits when they file their tax returns.
So if you are receiving all or part of the pandemic relief payments in the form of tax credits, they’d be arriving much later than otherwise. You might still not have received one or more of the three. Then if you file a Chapter 13 case within 6 months of that, having that tax credit not count towards your “disposable income” would be important.