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Pandemic Relief Payments Still Excluded from Chapter 13 Calculations

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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.

 

Means Test Extension beyond the CARES Act

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The CARES Act’s March 27, 2021 deadline for excluding pandemic relief payments from the means test was extended by one year to March 27, 2022.

 

Way back at the beginning of the pandemic the CARES Act made some helpful temporary changes to consumer bankruptcy law. (See our blog post in March 2020 about this.) Those changes had expiration dates which have now passed. However, in the meantime Congress passed two other laws which extended the changes. They are still temporary changes. As time passes, these consumer bankruptcy law changes and their new expiration dates continue to important. Today we focus on one of these changes, pertaining to the Chapter 7 means test.

All Pandemic Relief Payments Excluded as Income for the Means Test

The point of this first change is to avoid having the pandemic relief payments shut people off the bankruptcy protections of Chapter 7 “straight bankruptcy.” People could receive and spend their payments without jeopardizing their bankruptcy options. Here’s how it works.

To qualify for a consumer Chapter 7 case you have to pass the “means test.” Part of this test is a rather complicated calculation of what’s called your “current monthly income.” This is essentially the average of the last 6 previous full calendar months of income from virtually all sources. A single large payment—such as a $1,400 or $2,800 pandemic relief payment—could artificially increase your “current monthly income.” In many situations that would make you fail the “means test.” That would likely disqualify you from filing a Chapter 7 case. Then you’d not be able to legally write off (“discharge”) your debts in that 3-4 month process. Instead you’d have to resort to filing a Chapter 13 case, with a 3-to-5-year payment plan.

The 2020 CARES Act solved that problem by excluding any pandemic relief money from the definition of “current monthly income.” Section 1113(b)(1)(A) of the CARES Act. To be precise, the following was excluded from income:

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).

Coronavirus Aid, Relief, and Economic Security Act (“CARES”), Section 1113(b)(1)(A). Also found in the U.S. Bankruptcy Code Section 101(10A)(B)(ii)(V).

Since all 3 rounds of relief payments were made under this “national emergency,” none count towards your “current monthly income.” At least they don’t for a certain length of time.

Pandemic Relief Payments Received in the Last 6 Months

This exclusion from “current monthly 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 23, 2021), all payments received under these two rounds would fall within the 6-month look-back period of the means test. Excluding these payments would thus be necessary for many people to avoid failing the means test.

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. Among other things this brief Act extended this March 27, 2021 by one year.

The New Deadline

So with the Extension Act’s additional year, now this income exclusion of pandemic relief payments applies to Chapter 7 cases filed through March 27, 2022.

Most people will have received all their pandemic relief payments well before 6 months before that date. The initial $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 extension will be affecting fewer Chapter 7 filers over time as we approach the new March 27, 2022 deadline.

However, payments get delayed, sometimes for months, for often seemingly minor reasons. Where’s My Third Stimulus Check? 6 Reasons It Hasn’t Arrived Yet, Forbes Advisor.

Furthermore, even more significant delays can happen for one distinct reason. All three rounds of these relief payments are actually advances on tax credits. (“Recovery Rebate Credit.”) Some people fall between the cracks and simply don’t receive relief payments for which they are eligible. They can eventually get them as federal tax credits when they file their tax returns. The credit will be part of their tax refunds. (Or the credits will reduce their tax liability.)

The first two rounds were advance payments of the Recovery Rebate Credit for the 2020 tax year. 2020 Recovery Rebate Credit, IRS. The third round was an advance payment of the Credit for the 2021 tax year. So if you are receiving all or part of the pandemic relief payments in the form of tax credits, it may be a while before you receive them. Then if you file bankruptcy within 6 months of that, having that tax credit not count towards your means test could enable you to pass that test.

For Example

First, let’s say you just receive your $1,400 relief payment today, because of one of the many ordinary delays. Assume this is happening in late-May 2021. If you file bankruptcy between now and late November 2021, the 6-full-month look-back period would include this $1,400 payment. Because the COVID-19 Bankruptcy Relief Extension Act extended the deadline well beyond that, this $1,400 payment would not count towards the means test calculation.

Second, let’s say you didn’t receive the third, $1,400, relief payment. So you file your 2021 IRS tax return to get it as a tax credit. So you’d submit your tax return in late January 2022. Then say you’re lucky enough to receive a refund with the tax credit in late February. Then if you file your Chapter 7 case by March 27, 2022 you can exclude that tax credit from your means test calculation. That $1,400 tax credit would not be part of your “current monthly income,” making passing the means test much more likely.

However, now let’s say in a similar scenario you weren’t so fortunate. Say you didn’t receive your tax credit as fast and did not file your Chapter 7 case until after March 27, 2022.  Receiving that tax credit of $1,400, or $2,800 for a couple, or $5,600 for a family of four, would greatly increase your “current monthly income” amount. The higher amount could quite likely disqualify you from filing a Chapter 7 case.

The Bottom Line

Keep this March 27, 2022 deadline in mind. Not doing so could significantly reduce your options. See your local bankruptcy lawyer to apply all this to your own unique circumstances.

 

Borrowing to Pay Medical Debts

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Borrowing to pay medical debts creates new potential risks. A debt that was easy to discharge in bankruptcy becomes one that you often can’t.


About one-fourth (26%) of American adults (18-64 years old) reported that they or someone in their household had problems paying medical bills during the previous year. This is according to a 2016 survey by the highly reputable Kaiser Family Foundation, The Burden of Medical Debt. Not surprisingly, more than half of people who did not have health insurance reported such problems. However, more than one=fifth of people who had health insurance still had trouble paying medical bills. So if your medical bills are a challenge for you, you’re clearly not alone.

You may have options short of borrowing money to pay off the medical debts. It’s worth contacting the medical creditor—as early as possible—to find out their payment alternatives. Sometimes interest-free repayment plans are available. In some situations medical providers are willing to negotiate a settlement with you reducing the balance. Especially if you are uninsured, you might even qualify for financial assistance.

Borrowing Options

Once you’ve exhausted these options, you might be tempted to borrow money to pay off your medical debts. This may especially seem sensible if the bills have been sent to collection and/or you’ve been sued. Once they get a judgment against you, you can expect garnishment of your paycheck and/or bank account soon after. And if you own a home or other real estate, a judgment lien would likely attach to it.

However, borrowing to pay off your medical debts has its own risks. Let’s look at some borrowing options and their downsides. These options include:

  1. Credit cards
  2. Other unsecured personal loans
  3. Secured loans

Credit Cards

As you no doubt know, virtually all medical providers are happy to accept payment by credit card. So if you haven’t already maxed out your cards, it’s a convenient way of financing your medical bills. Because of the convenience, it’s a very tempting way to borrow to pay medical debts.

But it’s likely a very expensive source of credit. Interest rates tend to be substantially higher than other potential sources. Late fees and other charges can be significant. These various costs can make an already very challenging situation worse. Conceivably putting all your medical debts on credit cards could push you into bankruptcy when you could have avoided it otherwise.

There’s an additional danger if your financial situation is already very precarious before you put the medical debt on a credit card. Under certain circumstances the credit card creditors could challenge your right to “discharge” (permanently write off) the debt in bankruptcy. Their argument would be that you incurred the credit card debt without the ability or intent to pay it off. See U.S. Bankruptcy Code Section 523(a)(2)(A). As a result you risk changing a medical debt that bankruptcy almost certainly can discharge into a credit card debt that would be more difficult to do so.

So if you’re on the brink of considering bankruptcy, see a bankruptcy lawyer as soon as possible. Preferably see one before paying for medical debts with your credit cards. If you’ve already used your credit card(s) for this purpose, please see a lawyer before doing this any more.

Unsecured Consolidated Personal Loans

You may have various options for borrowing to pay for medical debts without providing any collateral.

You might qualify to get a loan to pay for specific procedures beforehand. For example, here’s a rather detailed review of one of these specialty lenders by Credit Karma.

There are medical credit cards, revolving credit accounts for ongoing medical expenses. For example, here’s Credit Karma’s  recent review of one of these healthcare credit cards.

More conventional personal loans can be used for medical debts and other purposes. Some lenders—such as SoFi—are able to lend relatively large amounts. Others, like United Medical Credit (a medical loan network referring you to the actual lenders), focus on loans with a co-signer.

All of these come with the same risk of potentially not being discharged in bankruptcy discussed above.

In addition, using a co-signer may have virtually the same effect. If you end up filing bankruptcy you would likely be able to discharge your own liability on the debt. But your co-signer’s liability would continue. So you may feel morally obligated to repay your co-signer whatever he or she ends up paying on your debt.

Secured Loans

The advantage of giving collateral to a lender is that this additional security usually results in a lower interest rate. And particularly when in the form of a home equity loan, payments are often extended over a long period. This results in a low monthly payment.

The disadvantage is that the creditor gets the right to your collateral if you don’t pay the loan on time. If you want to keep the collateral, you have to pay the debt. Even if you surrender the collateral, the creditor generally can chase you for any remaining balance after selling the collateral.

This is only a bit different in bankruptcy. You can choose whether to keep or surrender the collateral. If you keep it you’ll have to pay the debt, or at least up to the value of the collateral. If you surrender the collateral, you’ll either discharge any remaining balance or pay only some of it.

Bottom Line

Medical debts are almost always unsecured and easily discharged in bankruptcy. Borrowing to pay off medical debts potentially causes additional problems, as outlined above. If bankruptcy is at all conceivably on your horizon, try to avoid paying medical debts by borrowing to do so. Or before you borrow, use the situation as an incentive so see a bankruptcy lawyer to get some legal guidance.

 

Affordable Care Act Enrollment Deadline of August 15, 2021

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The usual deadline to apply for health care coverage under the Affordable Care Act was Dec. 15, 2020. It’s now been extended to Aug. 15, 2021.    

 

Our last several weeks of blog posts have been about health insurance and medical bills. Two weeks ago we got into the topic of health insurance and bankruptcy. Last week was a Q&A about medical bankruptcy. Today we provide urgent information about the current extended Special Enrollment Period for getting insurance under the Affordable Care Act.

Two Key Changes

In the last several months there have been two major developments with the Affordable Care Act (“Obamacare”).  First, a Special Enrollment Period allowed people to start health insurance coverage way past the usual December 15, 2020 deadline. Second, the American Rescue Plan Act lowered the cost of monthly premiums under the Affordable Care Act, often significantly.

The Special Enrollment Period

Normally you would have to apply to get or change coverage for 2021 by last December 15. The exception would be if you had a “life change” that qualified you for a Special Enrollment Period. These included household changes such as getting married, residence changes such as to a different county or zip code, or the loss of health insurance. Enroll in or change 2021 plans — only with a Special Enrollment Period, webpage at healthcare.gov.

However there’s now a blanket Special Enrollment Period based on the pandemic’s public health emergency. In late January, this Special Enrollment Period opened from February 15 through May 15, 2021, enabling new people to enroll for health care insurance coverage. Also, people already receiving coverage through the Affordable Care Act could change plans during this period. See White House Executive Order of Jan. 28, 2021, and Fact Sheet: 2021 Special Enrollment Period in response to the COVID-19 Emergency of the same date.

In March 2021 this Special Enrollment Period was extended through August 15, 2021, which is the current deadline. U.S. Dept. of Health & Human Services, Press Release of March 23, 2021.

Lower Priced—and Possibly $0—Monthly Insurance Premiums

Most people who were on Affordable Care Act insurance plan before the American Rescue Plan Act are paying lower premiums for the same insurance plan because of this new law. Premiums are slated to be about $50 less per person per month, or about $85 less per policy. American Rescue Plan and the [Health Insurance] Marketplace, March 12, 2021 Fact Sheet from the Centers for Medicare and Medicaid Services.

Also,

About 14.9 million Americans who currently lack health insurance will be able to save money on their premiums to find the coverage they need at a price they can afford….

U.S. Dept. of Health & Human Services, Press Release of March 12, 2021.

Partly as a result of these changes in the law, close to a million people signed up for Affordable Care Act coverage in the period from February 15 through April 30, 2021. More than half of these signed up in April, after the increased subsidies kicked in on April 1. New York Times article of May 6, 2021.

How to Get or Change Coverage

To enroll in an insurance plan, or to change plans, go to healthcare.gov’s New, lower costs on Marketplace coverage webpage. There you can find out if you qualify for Health Care Marketplace coverage. You can also preview available plan details and prices based on your income.

Remember that the deadline is August 15, 2021. However, since the American Rescue Plan Act subsidies have already kicked in as of April 1, 2021, the sooner you enroll or change your policy likely the better.

 

Answers about Medical Bankruptcy

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Even though legally there’s no such thing as a medical bankruptcy, many bankruptcies are caused by medical problems. Here’s a Q&A about these.   

 

The last two weeks we’ve written about health insurance. Two weeks ago we discussed the 6 months of free health insurance provided by the recent American Rescue Plan Act.  Last week we got into the broader topic of health insurance and bankruptcy. Today we broaden it out even more with a Q&A about medical bankruptcy.

What is Medical Bankruptcy, Legally?

Although the phrase is thrown around a lot, legally there is no such thing. The legally designated types of bankruptcy are labeled according to their Chapters in the U.S. Bankruptcy Code. Chapter 7, the so-called “straight bankruptcy,” and Chapter 13 “adjustment of debts,” are the most common forms of personal bankruptcy. Both Chapter 7 and 13 can deal effectively with medical debts and other financial problems arising from medical events.

What is Medical Bankruptcy, Practically?

 Although there’s no such legal designation, in fact a large percentage of bankruptcies are caused by medical events. One study estimated that more than half—about 61%–of personal bankruptcies had one or more medical causes. (Note that this was pre-COVID; this percentage is likely significantly higher during and after the pandemic.) The list of medical causes this study cited provides a good summary of the diverse kinds of “medical bankruptcies.” Here are some of the items on this list, along with the percentage of all personal bankruptcies applicable to this medical cause:

29.0 %: Debtor said medical bills were a reason for filing bankruptcy

32.1 %: Debtor said a medical problem of self or spouse was reason for filing bankruptcy

29.0 %: Debtor said medical problem of other family member was reason for bankruptcy

34.7%: Had medical bills of $5,000 or more, or more than 10% of annual income

5.7%: Had mortgaged family home to pay medical bills

38.2%: Debtor/spouse lost at least 2 weeks of income due to illness/complete disability

6.8%: Debtor or spouse lost at least 2 weeks of income to care for ill family member

So, practically speaking, if you have any of these challenges you could be considered to have a medical bankruptcy.

What Happens to Medical Debts in Bankruptcy?

It’s a surprising common myth that bankruptcy does not write off—legally discharge—medical debts. In almost all situations medical debts are legally categorized as “general unsecured debts. These are the most straightforward debts that are not secured by any of your property. These are treated less favorably than other more “important” debts—secured and priority debts. Secured debts are legally tied to your property—such as vehicle loans and home mortgages. Priority debts are special ones that the law protects for special reasons, like income taxes and child support. As general unsecured debts, medical debts are not treated favorably in either Chapter 7 or Chapter 13.

How Does Chapter 7 Deal with Medical Debts?

Under Chapter 7 “straight bankruptcy,” general unsecured debts, including medical debts, are almost always completely discharged. The minute your bankruptcy lawyer files your case all creditors, including medical ones, must stop all collection activity. This includes all collectors of medical debts as well. The stopped collection activity includes lawsuits and garnishments.

Then usually about 3 months later the bankruptcy court enters an order discharging all general unsecured debts. This means that those debts are forever legally gone, permanently uncollectable.

Are There Any Exceptions to this Straightforward Scenario?

There are three noteworthy although relatively rare possible exceptions.

First, most personal Chapter 7 cases are “no asset” ones: everything the debtor owns is protected, “exempt.” However, sometimes an asset is not exempt, and so must be surrendered to the bankruptcy trustee. He or she then sells the asset (or assets), and pays the creditors. Often all the sale proceeds go to your priority debts—such as taxes—leaving nothing for your general unsecured debts. If there is enough left over for the general unsecured debts the trustees pays these pro rata, divided up based on the amount of each debt. In such relatively unusual situations your medical debts would be paid something. Usually the amount that general unsecured debts receive is only a small portion of their total amounts.

Second, while almost all medical debts are unsecured, in rare situations they are secured by your property This only happens if you have affirmatively acted to give them a right—a “security interest”—to your property. If so you may have to pay the debt or else lose whatever property or possession that secures the debt. Again, this is rare, and you would usually know if you have done this. If you don’t know and are concerned about this, talk with your bankruptcy lawyer.

Third, although virtually all medical debts are dischargeable, all creditors technically have the right to object to the discharge of its debt. This almost never happens with medical bills—it’s almost not worth mentioning here. The objection would need to be based on allegations of fraud or misrepresentation by you against the medical provider. Again, if you have any concerns about this, talk with your lawyer.

How Does Chapter 13 Deal with Medical Debts?

Chapter 13 is quite different from Chapter 7, involving a 3-to-5-year payment plan. They are usually filed when a person has significant issues with secured debts (vehicle loans, home mortgages) and/or priority ones (income taxes, child/spousal support). The payment plan is based on how much a debtor can afford to pay each month to all creditors. The plan designates which debts get paid how much and when.

Usually, general unsecured debts receive payment through the Chapter 13 plan only to the extent there is money left over. For example, a plan must pay all priority debts in full before anything goes to the general unsecured debts. If you’re catching up on a vehicle loan or home mortgage, you pay these in full before paying the general unsecured debts anything. This means that sometimes the general unsecured debts—including the medical ones—receive nothing. Often they receive only pennies on the dollar.

After the payment plan is completed, any unpaid medical debts—along with all other general unsecured ones—get permanently discharged.

Will My Medical Provider Stop Serving Me If I File Bankruptcy on Its Medical Debts?

Not likely. Any creditor, medical providers and otherwise, can chose to not serve you during or after a bankruptcy case. This is true whether you are asking for services on credit or not. But practically speaking most medical providers don’t end their relationship with you because you avail yourself of the legal tool of bankruptcy.

But policies about this do vary, regionally and between various kinds of medical providers. So if you are concerned about a particular provider you may want to call them and just directly ask.

Can I Favor My Medical Provider in Bankruptcy?

People sometimes have special feelings for their medical provider, such as their personal doctor or an important specialist. They may fear disrupting that relationship by filing a bankruptcy which discharges that provider’s debt. So can and should you favor that provider by paying its debt more than or instead of other debts?

The simple general answer is no. One of the overarching rules in bankruptcy is that debts that are legally the same must be treated the same. That’s certainly true during the bankruptcy proceeding. In both Chapter 7 and Chapter 13 cases medical debts are treated like any other general unsecured debt. So, in the example of a Chapter 13 plan, you can’t earmark extra money to a general unsecured medical debt.

How about Paying a Medical Provider Before or After Bankruptcy?

It’s risky to try to favor a medical debt before filing bankruptcy. A significant payment to any creditor while you’re not paying other creditors can cause problems. It may be challenged as a “preference” payment. This is especially true if at that time you’re considering filing bankruptcy, and it’s close to when you actually file your case. Your medical provider could be ordered to pay the money back, but to your bankruptcy trustee. The specific rules about this are complicated, but generally it’s not a good idea to be paying medical providers more than other creditors before filing bankruptcy. Again, this is a topic to discuss with your bankruptcy lawyer.

After finishing a bankruptcy case nothing prevents you from paying a medical creditor, but it’s almost never worthwhile to do so. You are allowed to pay any creditor once the case is over. But there is almost never any practical benefit. The creditor can’t require you to pay a discharged debt, or condition continued services on you doing so. There would be no benefit to your credit record. The only reason to do this is for moral reasons, to fulfill some sense of obligation. This is true whether this would be to a doctor, a friend, or to anybody else. Almost always at that point you should instead just move on and focus on rebuilding your financial life going forward.  

 

Health Insurance and Bankruptcy

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Having health insurance is extremely important. Both Chapter 7 and Chapter 13 bankruptcy can help you get and keep your health insurance.  

 

Last week we discussed the 6 months of free health insurance provided by the recent American Rescue Plan Act.  It may apply to you if you lost your job and your health insurance with it. If this applies to you please check out that blog post.

Today’s blog post gets into the broader topic of health insurance and bankruptcy.

There’s lots of evidence “that medical bills are the single largest causal factor in consumer bankruptcy.” Medical Debt as a Cause of Consumer Bankruptcy. Studies have been showing this for many years.

What may be more surprising is that most people who file bankruptcy have health insurance at the time of filing. According to one study nearly 70% of personal bankruptcy filers had health insurance. Medical Bankruptcy in the United States, The American Journal of Medicine.

More to the point, virtually the same percentage applies even for those who file “medical bankruptcy” cases. Think about it. Nearly 70% of people who file bankruptcy giving medical bills or illness as specific reasons for filing had health insurance. They had to file bankruptcy for medical reasons even though they had health insurance. They needed legal financial relief even though they had insurance that presumably covered much of their healthcare costs.

So, if you are contemplating bankruptcy even though you have health insurance, you are certainly not alone.

So today we answer questions about bankruptcy and your health insurance.

Can Bankruptcy Help Me Prioritize Health Insurance?

Do you not have health insurance now because you can’t afford the monthly premiums? Bankruptcy could “discharge” (legally write off) your debts so that you could more likely afford the insurance.

You know it’s really important to have health insurance. People tend to put off preventative medical care when they don’t have insurance. So it’s unhealthy not to have insurance.

If you don’t have insurance your medical bills are significantly larger because you’re charged more. That’s because medical providers agree to reduced “allowed” amounts with insurance companies for most medical services. Plus of course if you wait until your condition is worse that is often both unhealthy and much more expensive.

On top of everything else, you’ll likely have difficulty getting the medical services you need if you don’t have insurance. It’s true that “due to federal law, hospitals are required to provide emergency treatment on credit.” “And in most cases [they] provide nonemergency care without an upfront payment as well.” Bankruptcy as Implicit Health Insurance, p. 1, National Bureau of Economic Research. Nevertheless, practically speaking it’s difficult to establish an ongoing relationship with a general practitioner, much less any needed medical specialists, under these circumstances. So again, your health suffers.

Clearly, health insurance is super important. It has to be among your very highest priorities. Both “chapters” of consumer bankruptcy—Chapter 7 and 13—enable you to prioritize this need.

How Could Chapter 7 “Straight Bankruptcy” Help?

Chapter 7 is a relatively quick procedure for discharging all or most of your debts. The minute you file you can stop paying all or most of your debts. This includes both voluntary payments and involuntary ones like wage and bank garnishments. So your monthly cash flow usually improves right away. This frees up money for your high-priority expenses, like health insurance.

This can be particularly helpful if you’ve been putting off medical (and/or dental) procedures while you’ve been without health insurance. You can discharge your debts now so that you can afford this essential expense in the coming months and years. You’d also be better able to pay for that portion of medical expenses—co-pays and deductibles—not covered by insurance.

If you have insurance now but without very good coverage, filing bankruptcy now may enable you to get better coverage. This would especially make sense if you anticipate relatively high upcoming medical expenses. You’d be getting a fresh financial start now while lowering out-of-pocket medical costs into the future.

Lastly, Chapter 7 empowers you to deal wisely with all kinds of anticipated changes in your financial circumstances. For example, the free health insurance premiums referred to in the first paragraph runs out as of the end of September 2021. If you happen to qualify, filing bankruptcy now could enable you to afford the premiums once this free period expires.

How Could Chapter 13 “Adjustment of Debts” Help?

Chapter 13 is different because it’s not quick: it involves a 3-to-5-year payment plan. You get protection from creditors’ collection efforts right away just like under Chapter 7. But then you essentially pay whatever you can afford each month. Often most of what you pay goes to certain high-priority debts, and other debts get little, or sometimes even nothing.

The good news is that you usually get to pay your health insurance premium ahead of your creditors. In determining how much you pay “into the plan” each month to your creditors, you get to subtract your reasonable living expenses. Bankruptcy law treats health insurance premiums as a necessary and reasonable expense for this purpose.

Also, future out-of-pocket medical expenses (beyond the monthly premiums) are also considered reasonable expenses. So your bankruptcy lawyer will include an estimated monthly amount for such medical expenses. Again, you can pay these out-of-pocket medical expenses ahead of paying the creditors in your payment plan.

Furthermore, if your after-filing medical expenses increase beyond the amount initially budgeted, you could change (“amend”) your Chapter 13 plan. You’d show that your medical expenses have gone up. This would lower your Chapter 13 plan payment amount, and possibly extend the plan’s length.

 

Get 6 Months of Your Health Insurance Premium Paid

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You could get 100% of your health insurance paid from April through September 2021 if you lost your employer-based insurance during the pandemic.     

 

Last month’s American Rescue Plan Act included the $1,400 stimulus payments, expanded unemployment insurance, and many other benefits. One other less well-known benefit pays your health insurance if you’ve lost your job and your health insurance with it. Today’s blog post talks about this new free health insurance.

What is This Health Insurance Benefit?

This benefit could potentially pay your and your family’s entire health insurance premiums for April through September of 2021.  The White House, American Rescue Plan.

That could save you lots of money. You’d save by not having the pay the monthly insurance premiums. But you could especially save by having coverage for any health care costs that would arise during this time.

This new benefit is available to you if you lost your employer-based health insurance because of involuntarily losing your job. It also applies if you lost your health insurance because your work hours were reduced. However, this paid coverage does not kick in if you lost your job because of “gross misconduct.”

The paid coverage starts as of April 1, 2021. But you don’t need to have lost your job or had your hours reduced after that date. Your job loss or hours reduction could have happened as long ago as late 2019. U.S. Dept. of Labor, FAQS about COBRA Premium Assistance under the American Rescue Plan Act of 2021, April 7, 2021.

This Is a COBRA-based Benefit

COBRA is the federal law which enables people to continue their group health insurance after losing a job. Or, again, after losing coverage because of reduced work hours. ” COBRA generally… allows you (and your family) to continue the same group health coverage at group rates.” U.S. Dept. of Labor, COVID-19 FAQs for Participants and Beneficiaries, April 28, 2020. Group health insurance rates are usually lower than individual rates. However, your monthly premium cost still usually goes up substantially. That’s because you have to pay your former employer’s share, as well as your own.

So the good news is that the federal government will pay all of your COBRA monthly premiums for April through September if you qualify.

You can’t qualify if you are eligible for Medicare. Same if you’re eligible for any other group health plan. Examples are group plans by a new employer or a spouse’s employer.

To qualify for this new benefit paying for your COBRA insurance you first have to             qualify for COBRA.

How to Qualify for COBRA

You should know whether you qualified for COBRA, the continued group health insurance coverage, after losing your job or hours. That’s because your employer almost for sure would have told you. More precisely, the law strictly requires employers to give employees or former employees information about their COBRA rights. COBRA applies to all employers with 20 or more employees.

Broadly speaking, you qualify for COBRA by meeting 3 conditions:

1) your group health plan must qualify,

2) you must have had a qualifying event, and

3) you must be a qualified beneficiary.

Your plan qualifies with the above-mentioned 20-employee minimum. Part-time employees count towards this 20-employee minimum, on a pro-rated basis depending on their hours worked. (For example, 10 half-time employees count as 5 employees for this.) Look to the number of employees in the prior calendar year. If there were 20 or more for more than 50% of the work days of that year, the plan qualifies. This includes private and local and state governmental employers; federal employees have a special COBRA-like law.

Qualifying events cause a person to lose group health insurance coverage. Involuntary termination (except for “gross misconduct”) and reduction in hours below the minimum for coverage are the main qualifying events.

To be a qualified beneficiary you must have been on your employer’s health insurance plan on the day before the qualifying event.

See the U.S. Dept. of Labor’s FAQs on COBRA Continuation Health Coverage for Workers for more information on qualifying for COBRA.

How to Get Your COBRA Health Insurance Premiums Paid

If you qualify, the insurance plan should send you “a notice of your eligibility to elect COBRA continuation coverage and to receive the premium assistance.” FAQS about COBRA Premium Assistance under the American Rescue Plan Act of 2021, pp. 4-5.

If you think you qualify but do not receive this notice, you should notify your employer or former employer. Use the simple 2-page form called Request for Treatment as an Assistance Eligible Individual on this webpage.

 

If You Already Owe Income Taxes

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What do you do (and not do) if you already owe 2018 or 2019 income taxes, or earlier, and haven’t yet sent in the latest tax returns?     

 

What if you owe 2020 income taxes even though the IRS is not taxing $10,200 of unemployment income that year? That was our topic last week. The first $10,200 of unemployment is not being taxed because of last month’s American Rescue Plan Act. This week’s topic covers your options if you owe income taxes for prior tax years. Even if you don’t owe for 2020, or owe less, that may not help much if you were already behind.

If You HAVEN’T Submitted Recent Tax Returns

For tens of millions of Americans the last year has been the most financially disruptive in their lifetimes. Many lives were turned upside down around a year ago. If that includes you it’s understandable that you had trouble preparing and sending in your 2019 income tax returns.

The IRS recognized this to some extent by extending its tax return deadline from April 15 to July 15, 2020. So did virtually all states with income taxes (which include 41 out of the 50 states). But if your financial challenges went beyond last July, you may still not have made that deadline. Indeed you may not have submitted them even now, if you owe and have no ability to pay.  That may be especially true if you were already a year or more behind on taxes at that point.

If any of this is true, you most likely realize that you’re in a scary and rather dangerous situation. It’s only natural to try to avoid something that’s scary, especially when there seems to be no practical way out.

The reality is that this is indeed a dangerous situation. The IRS imposes a series of penalties for not sending in income tax returns when due. For individuals there’s an initial $435 failure-to-file fee. (That’s for returns due starting 1/1/2020. It’s a more than doubling jump from $210 for returns due during the years 2018 and 2019.). In addition, there are significant steep penalties for each month you don’t file. On top of that there are monthly penalties for the failure to pay the amount due. IRS’ Common Penalties for Individuals. States with income taxes impose similar penalties.

So the sooner you send in your tax returns the less failure-to-file penalties you’ll owe. But what if you can’t pay what you owe?

If You HAVE Submitted Prior Tax Returns

Now what if you did submit tax returns for a prior year or two—for 2018 and/or before—and you already owe income taxes?

That may further tempt you not to submit the 2019 tax returns if you think or know that you also owe for that year. If you’re in an IRS payment plan and you can’t pay more, you don’t want to upset that payment plan. If you’re not in a payment plan and lying low, you may not want to catch the IRS’ attention. You sensibly figure nothing will catch their attention more than a new tax return showing that you owe even more.

But you know that this can’t end well because the IRS knows that you haven’t submitted the 2019 tax return. If you are in a payment plan with them you violate that plan by not timely submitting subsequent tax returns. If you’re not in a payment plan you know that it’s only a matter of time. Indeed the missing 2019 tax return may well spur the IRS into action.

Besides, the not submitted 2019 tax return is accruing serious failure-to-file penalties, quickly increasing the amount you owe.

So you’re in a real conundrum.

The Only Practical Solution

There’s only one way out of this serious Catch-22: find out your real options. Consider the following:

  1. Do you owe prior year’s income taxes for which you’ve submitted tax returns? You may be able to write them off in bankruptcy. If you meet certain conditions you can “discharge” them and owe nothing. That usually includes the tax and the accrued penalties and interest.
  2. What if you owe income taxes which don’t qualify for discharge? Discharging other debts with a Chapter 7 “straight bankruptcy” may enable you to afford to pay the tax. The IRS and many states have reasonable payment plans, allowing you to stretch out the payments over a long period. The Chapter 7 filing would even stop any immediate collection efforts by the IRS/state for a few months. During that time you’d set up the payment plan. You can even likely minimize your contact with the IRS by applying online, and getting immediate approval.
  3. What if you still can’t afford an IRS payment plan? Or what if the IRS is amenable but your state is not? Or what if you have other aggressive creditors whose debts Chapter 7 does not discharge? Examples are child or spousal support, or vehicle loans or mortgages you’re behind on and need to bring current. Chapter 13 “adjustment of debts” stops tax collections, as well as by other special creditors, much longer than Chapter 7. Then through a court-approved payment plan you can prioritize paying the more urgent debts. The other creditors—including the IRS/state—have to wait their turn in line. Tax interest and penalties usually stops accruing—for up to five years—saving you a ton.

Your Next Step

These give you just a small taste of the many ways Chapter 7 or Chapter 13 could get you out of the seemingly impossible situation you’re in.

The additional really good news is that finding out more would likely cost you nothing. What you need to know is whether and how Chapter 7 or 13 could help your personal situation. Your local bankruptcy lawyer’s job is to understand your situation and give you honest advice about your options. Not just about your income tax conundrum, but about all your debts and financial life.

A significant step in that direction will happen at your initial consultation meeting, which is free. Of course you have no obligation to hire the lawyer or to file any kind of bankruptcy after that meeting. But you’ll leave with crucial information about whether and how you can get out of your tax Catch-22. You’ll learn about options for getting your financial house in order. Most of the time people are deeply relieved, and often really surprised, at how good the solution is. Often our clients very much wish they would have come to see us earlier, avoiding the anguish they’ve been feeling for way too long.  

 

If You Owe Taxes (Even If Unemployment Benefits Aren’t Taxed)

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Do you owe 2020 income taxes even though the IRS is now not taxing the first $10,200 of unemployment income? What to do and not to do.  

Last week we discussed the extent to which unemployment income is not taxed because of the American Rescue Plan Act. Generally, you don’t pay federal (and possibly state) income tax on the first $10,200 in benefits you received in 2020. Section 9042(a) of the Act. (See our last blog post about qualifying for this, and other details.)

Let’s get into two significant practical problems you may still have in spite of this substantial benefit:

  1. You received more than $10,200 in unemployment benefits and so you owe income taxes on that extra amount.
  2. You had other income separate from unemployment benefits and owe income taxes on that other income.
  3. You owe income taxes for prior tax years. So now you’re afraid of filing the 2020 tax returns and having the IRS/state start to chase you down.

We’ll discuss the first two of these situations today, the third one a week from now.

1. More Than $10,200 in 2020 Unemployment Income

If you were unemployed for a substantial part of 2020 you may well have accrued more than $10,200 in unemployment income. That’s especially true if you qualified for the additional $600 per week (later reduced) in extra federal pandemic unemployment income. Note that the income exclusion applies to both state and federal unemployment benefits. U.S. Dept. of Treasury Fact Sheet, March 18, 2021 (see final paragraph). So they can add up fast is you were unemployed for an extended time.

Regarding this, first realize that for joint filers you’re EACH entitled to the $10,200 income exclusion. BUT, you can’t just double the excluded amount to $20,400 if you’re filing jointly; each spouse has a $10,200 maximum. IRS Post Release Changes to Forms, New Exclusion of up to $10,200 of Unemployment Compensation. For example, assume you had $15,000 and your spouse had $5,000 in the unemployment income, totaling in $20,000.  In the joint return you wouldn’t be able to exclude all $20,000. You could exclude just $10,200 of the $15,000, while your spouse could exclude all $5,000, a total of 15,200.  That means that $3,800 of your benefits would be federally taxable (and likely by your state, too).

Second, just because you have taxable unemployment income (the $3,800 in the above example), doesn’t necessarily mean you’ll owe taxes. There are countless considerations determining whether you’d actually owe tax if you have a relatively low amount of taxable income. One important consideration is that the standard deduction in 2020 for individuals is $12,400, $24,800 for those filing jointly. IRS News Release, IR-2019-180. Your applicable standard deduction (or itemized deductions) may more than cover any non-excluded unemployment income.

However, after all is said and done you may find out that you do owe federal income taxes. And possibly state income taxes as well. See below, after the next section, for more about what to do then.

2. Owe Tax on Other 2020 Income

Let’s say you did have unemployment income in 2020 and it was all covered by the $10,200 federal exclusion. But you had other taxable income for which you did not withhold or pay any (or enough) estimated taxes.

Similar to what we stated above, you may still not owe any federal income taxes because of other considerations. (As just one example, the stimulus (“Economic Impact”) payments are not taxable income. IRS Tax Tips, May 12, 2020.) So you absolutely should prepare your tax returns or have them prepared for you. Do not live in fear; as the saying goes, it is better knowing rather than not knowing. This is especially true if 2020 was different for you financially than prior years. It sure has been different for just about everybody! You might be pleasantly surprised that you don’t owe, or that you owe only a modest amount.

If You Still Owe 2020 Income Tax

So you do prepare your 2020 tax returns and find out you owe regardless of the $10,200 unemployment income exclusion. What now?

Let’s say the tax owed is quite modest, but still too much to pay in a lump sum. The most sensible solution might be to apply online for an IRS payment plan. One advantage is you don’t need to talk to anyone—it’s all online. Plus they have a lower fee than other options. Both individual and business taxpayers can qualify. There are short term (120 day) and long-term monthly plans available. The long-term plans are not expensive: $31 for individuals—potentially waivable for low income—and potentially that low for businesses. However, interest and penalties continue to accrue and can add up quickly.

But what if the tax owed is more than you can afford to pay monthly on an IRS payment plan? You may have no room whatsoever in your monthly budget to pay the IRS anything. Or you may owe more to the state taxing authority (especially if it’s fully taxing your unemployment) and have no money to pay it.

Maybe you’ve never been behind on income taxes. So you are understandably worried about having the IRS and maybe also your state chasing you. Or you have some experience with the federal and state taxing authorities and know something about their collection powers.  Either way, you’re justifiably concerned.

Don’t Avoid Sending in the Tax Returns

If you owe income taxes don’t do what may feel tempting: not submitting the tax return when it’s due. You might think you’ll buy some time by laying low. You figure if they don’t know you owe, they won’t start chasing you for it. It’s all too human to hide from something that’s scary, especially when there seems to be no practical solution.

But you’ll pay a very heavy price for the time you think you’re buying. There are a series of penalties by the IRS (and by your state) for failure to timely file income tax returns. For individuals there’s a flat $435 starting failure-to-file fee (for returns due starting 1/1/2020). In addition there are significant steep penalties for each month you don’t file. On top of that there are monthly penalties for the failure to pay the amount due.

So almost certainly you want to submit the tax returns when they are due.

Get Good Guidance

However, both for practical reasons and for your mental health you’d be wise to get some guidance about your options. And common sense says you should get that guidance before you submit the returns.

Let’s face it. If you cannot afford to pay the IRS (and/or state) monthly payment plan, most likely you’re in broader financial trouble. You likely have more than one high-priority debt that you’re trying to juggle. This new debt to the IRS/state is a sign that you need to find out your legal options.

Without going into greater detail here, you likely do have some sensible options. For example, it may be worth getting rid of other debts through a Chapter 7 “straight bankruptcy.” Then you could much better afford to pay your income tax debts. Or you may have other competing special debts—like a mortgage or vehicle loan in arrears, or child/spousal support. A Chapter 13 “adjustment of debts” would protect you from all these especially powerful creditors.

See more information about these options elsewhere in this website. And call us, your bankruptcy lawyers, for some good guidance about your options, bankruptcy or otherwise.

 

Unemployment Benefits Not Taxed

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If you’re one of the 1 in 4 Americans who received unemployment benefits during the pandemic, the IRS is not taxing the first $10,200 of it.   


Unemployment Benefits Are Generally Taxable

As the IRS states plainly, “[i]f you received unemployment compensation during the year, you must include it in gross income.” Unemployment Compensation, IRS Topic No. 418. Furthermore, “unemployment compensation” explicitly includes not just the usual “state unemployment insurance benefits.” It also includes “Federal Pandemic Unemployment Compensation provided under the… CARES Act of 2020.” Unemployment Compensation.

If you received unemployment benefits in 2020 you had the option of having income taxes withheld. Or you could have paid quarterly estimated tax payments. But you may not have been aware that unemployment benefits were taxable. Or money was so tight that there just wasn’t enough to have some of it withheld. And there wasn’t any money to pay estimated tax payments, if you even realized when those were due.

All of which means that you may have been dreading preparing and filing your 2020 income tax returns. You’ve been afraid of owing income taxes because of having received unemployment benefits in 2020. Or you hadn’t heard that those benefits were taxable but now you’re worried about it.

American Rescue Plan Exempts $10,200 of Unemployment Benefits

There’s some very good news about this. Because of the recently passed American Rescue Plan Act, you likely won’t pay federal income tax on the first $10,200 of those benefits. And you may not pay state income tax on it either, depending on the state.

To qualify, your adjusted gross income for 2020 must be less than $150,000. Section 9042(a) of the American Rescue Plan Act. This adjusted gross income maximum is the same even if you are filing jointly. If your adjusted gross income is $150,000 or more you aren’t able to exclude any unemployment compensation. IRS Post Release Changes to Forms, New Exclusion of up to $10,200 of Unemployment Compensation.

If you do qualify, this income exclusion applies to both traditional state unemployment benefits and the additional federal ones added in 2020.  U.S. Dept. of Treasury Fact Sheet, March 18, 2021.

Plus, “in the case of a joint return… each spouse” may exclude $10,200 of such benefits from gross income. Section 9042(a). However, that maximum does not increase for one spouse if the other did not receive any or less unemployment benefits. Each person can exclude no more than $10,200. Note that you CAN exclude as much as $20,400 of unemployment benefits if both spouses received $10,200 or more.

What about State Income Taxes?

Whether you pay state income taxes on unemployment compensation in general circumstances depends on your state. Now whether this new $10,200 exclusion applies also depends on your state.

In some states—California and New Jersey, for example—unemployment benefits are simply never taxed as income. Many other states follow federal law regarding what income is taxed, so in these states the $10,200 exclusion should apply. Check with your state’s taxing authority for information about whether the federal unemployment benefit exclusion applies. Here’s a list showing which states tax unemployment benefits, and which are “coupled” to this new exclusion of those benefits.

If You Haven’t Filed 2020 Tax Returns

Prepare your tax returns—or have your tax preparer do so—appropriately excluding the right amount of your unemployment benefits. Actually you’ll report your total unemployment benefit amount as income. Then you’ll separately exclude the right amount based on the IRS Unemployment Compensation Exclusion Worksheet. You can find that Worksheet at the end of these IRS instructions.  

If You’ve Already Filed 2020 Tax Returns

Have you already filed your income tax returns without knowing about this income exclusion? If so, you obviously want to take advantage of it. It will likely lower your tax liability and/or increase your tax refund. Depending on your tax rate, it could swing you in the right direction by about $1,000.

Common sense may tell you to quickly submit an amended return to take care of this. But not necessarily. This is what the IRS is saying at the moment:

If you have already filed your 2020 Form 1040 or 1040-SR, you should not file an amended return at this time. The IRS will issue additional guidance as soon as possible.

IRS, New Exclusion of up to $10,200 of Unemployment Compensation (reviewed or updated March 24, 2021).

Depending on the circumstances, filing an amended tax return could potentially actually slow things down. The IRS is dreadfully understaffed and is taking a long time to process both tax returns and especially amended ones. It may be quicker to let it process your original tax return, and potentially automatically exclude your unemployment benefits. This is what at least one state is saying in response to this specific situation:

You do not need to file an amended return. The [state department of revenue] will correct it for you, and, in most cases, you will receive a refund or have a lower tax bill.

Of course, talk with your tax preparer, if you have one. And keep checking back to this IRS webpages for updates on the topic of Unemployment Compensation and Coronavirus Tax Relief.

 

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