The new pandemic relief law includes some helpful changes to bankruptcy law, including some protection of the $600 economic impact payments.
The federal Consolidated Appropriations Act (CCA) was enacted on December 27, 2020. It is reportedly the longest single bill ever passed by Congress. Within its 5,593 pages are about 15 pages of temporary changes to the federal Bankruptcy Code. We cover one relatively straightforward and helpful change here today.
Pandemic Relief Payments Protected in Bankruptcy
The $600 pandemic “economic impact payments” are completely protected for you if you file a bankruptcy case.
When filing a bankruptcy case you generally get to keep what you own at the time you file the case. Legalistically, just about everything you own is called property of your bankruptcy estate. Section 541(a) of the U.S. Bankruptcy Code. Then most of the time you can use “exemptions” to protect that “property of the estate.” As long as the exemptions cover everything you own, everything’s protected.
But the law labels certain unusual kinds of property as NOT being “property of the estate.” Section 541(b) of the Bankruptcy Code. These are even better protected for you because they are basically not even under the jurisdiction of your bankruptcy case. It doesn’t need an exemption to protect it. If something is legally defined as not “property of the estate,” it’s effectively not part of your case. It’s totally yours to do with whatever you want.
The new law protects the $600 “economic relief payments” by making clear that they are NOT property of the estate. Specifically, “recovery rebates” are included in the list of property that’s not property of the estate. Consolidated Appropriations Act, Division FF, Title X, Section 1001(a). This means that your bankruptcy trustee can’t touch that money. It’s simply yours, whether you’ve already gotten it or whenever it arrives.
This change in the law expires on December 27, 2021. Most people who get the $600 payments will have received (and spent) them well before then. But those who don’t get them in the form of a payment can get them in the form of a tax credit when filing federal income tax returns. If that’s your situation, talk with your bankruptcy lawyer about this and related timing issues.
$600 Pandemic Payments’ Effect on the Means Test
The CARES Act of last spring contained another form of protection for pandemic relief payments. It was aimed at the original $1,200 payments distributed through that earlier Act.
The CARES Act excluded such payments from your “current monthly income” for purposes of the “means test.” The means test determines whether you can file a Chapter 7 “straight bankruptcy” case. If not you could be stuck with a Chapter 13 “adjustment of debts” case. A Chapter 7 case usually takes 3 or 4 months. A Chapter 13 case takes 3 to 5 YEARS, and almost always costs significantly more.
Without getting too deep into it, excluding pandemic relief payments from the means test makes passing the means test easier. Part of that test is a rather complicated calculation of your “current monthly income.” Essentially that’s the average of the last 6 full calendar months of income from virtually all sources. A single large payment—such as a $600 pandemic “economic impact payments,” or $1,200 for a married couple—could artificially significantly increase your “current monthly income” and make you fail the “means test.”
Unlike the prior CARES Act, the new Consolidated Appropriations Act enacted on December 27 does not include this same kind of protection. Does this mean that you and your lawyer must include the $600 relief payments in calculating the means test? Might receiving this “economic impact payment” effectively disqualify you from filing a Chapter 7 case?
It’s a Matter of Timing
Perhaps not. These payments may well be protected by the CARES Act. It’s means test protection directly designed for the old $1,200 relief payments very likely also applies to the new $600 payments.
CARES excluded the following from the means test:
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).
The new $600 “economic impact payments” are certainly being made under the same continuing national emergency related to the pandemic. So, while the new Consolidated Appropriations Act does not provide new “means test” protection, the CARES Act’s protections continue. (See our blog post of April 13, 2020 about the Consumer Bankruptcy Changes in the CARES Act.)
However, your access to those protections may well depend on the timing of your bankruptcy case. That’s because the CARES Act protections have a fast-approaching expiration date. The means test part of CARES is to be deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2). CARES was enacted on March 27, 2020. That means that these two changes apply to all cases filed any time before that date but only through March 26, 2021.
It’s possible that this deadline will get extended. But an extension was not in the new law. And the expiration is barely two months away as of the writing of this blog post. So there’s a good chance that time will run out.
See your bankruptcy lawyer about how all this would apply to you, and if there have been any subsequent changes in the law.