In these difficult times, many people will turn to bankruptcy for relief from debt payments they can no longer afford to make. Some may still be waiting to receive their economic impact payment, more commonly referred to as the “stimulus”. If you have not yet received the stimulus payment, should you go forward with filing Chapter 7? For Arizona residents who file bankruptcy using the Arizona exemptions, the answer to this question is not a simple “yes” or “no”.
On March 27, 2020, President Trump signed the CARES Act into law. Bankruptcy cases filed after the March 27th effective date potentially include the stimulus payment as bankruptcy estate property; this issue is not clarified in the Act. Assuming the stimulus qualifies as bankruptcy estate property, Congress did not implement protective language in the Act to keep the funds in the hands of debtors, and away from Chapter 7 bankruptcy trustees. This means that, absent an exemption to protect the stimulus funds, a Chapter 7 bankruptcy trustee could possibly require a debtor to surrender the payment for distribution to creditors.
The exemption laws for many states, as well as the set of federal bankruptcy exemptions, include a “wildcard exemption” that could be used to protect the funds. Arizona law, however, lacks a “wildcard exemption”, or any other exemption applicable to stimulus payments. A debtor who has lived in Arizona for a continuous 24-month period prior to filing bankruptcy receives the Arizona exemptions. Therefore, a Chapter 7 debtor who has been an Arizona resident for at least two years could be subject to surrendering the stimulus funds to a trustee. This translates into a potential loss of up to $3,400 for a family of four.
You probably think it heartless of a bankruptcy trustee to deprive a debtor of a stimulus payment designed to cover necessary living expenses, such as food and shelter. Apparently, the Office of the United States Trustee, which oversees the individual bankruptcy trustees, to a certain extent agrees. The U.S. Trustee issued a Notice to trustees with the following suggestion:
“Regardless of whether the rebate is property of the estate, the United States Trustee expects that it is highly unlikely that the trustee would administer the payment after consideration of all relevant circumstances, including: the modest amount of the recovery rebate; the applicability of state and federal exemptions; any interest of a non-debtor spouse in the recovery rebate; the cost to the estate of recovering and administering the recovery rebate, including litigation with debtors who may seek a judicial determination; and the extent to which recovering the recovery rebate will enable creditors to receive a meaningful distribution.”
DESPITE THIS, THERE STILL IS RISK
Although the U.S. Trustee’s Notice sounds comforting, the bottom line is that it does not preclude a Chapter 7 trustee from requiring a debtor to turn over stimulus funds. Some of the Arizona trustees have indicated they will not administer stimulus monies, but unfortunately, you do not know which trustee will be assigned to your case in advance of filing. In the end, there is some risk of loss for many Arizona debtors who file Chapter 7 prior to receiving and spending their stimulus payments on living expenses. Whether the risk outweighs the benefits depends upon your unique set of circumstances. For example, if your wages are being garnished, and the stimulus amount you are eligible to receive is low, then it may not make sense to delay the Chapter 7 filing.
TIMING IS EVERYTHING
Because there is talk of a second stimulus payment, you may be wondering whether you need to worry about losing any payment that may be enacted in the future. Timing is the key. If a law authorizing a second payment goes into effect after you have already filed Chapter 7, it is yours to keep. Such a payment is clearly not property of the bankruptcy estate, as entitlement to the funds must arise before the case is filed for it to potentially become estate property. However, if you are presently planning a Chapter 7 bankruptcy, but do not actually file it until after the effective date of a second stimulus payment, you should take the risk of loss into consideration.
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