Many people are wondering if any future stimulus checks may be taken by the bankruptcy trustee if they file bankruptcy. These stimulus checks are helping a lot of people make important repairs to their vehicles and homes, buy clothes and supplies for their children, and support local businesses while giving themselves a much-needed break by ordering in. So can you keep your stimulus checks in a bankruptcy? And what if you still have not received your checks?
The short answer to this is yes, generally you can. The stimulus packages have specifically exempted these checks from being considered income by the bankruptcy court. Depending on the type of bankruptcy you file, this can affect different things.
If you want to file a Chapter 7 bankruptcy you need to pass the means test. The means test looks at the past 6 months of your income. The means test will not include the stimulus checks. That means that when determining if you qualify for a Chapter 7 based on your income, the stimulus checks will not hurt you by artificially increasing your income over the last 6 months.
When filing a Chapter 13, your income over the last 6 months determines how long you must be in the case and can affect your monthly payment amount. By excluding the stimulus checks from income, it helps keep some households in shorter cases with lower payments than they would have been if the checks had been considered income.
In addition, if you are in an active Chapter 13 case, the stimulus checks do not become “extra” income the same way a bonus or overtime would be and will not affect your payment the same way working regular overtime or getting a bonus might. In addition, some trustees have simply said they will not be attempting to take these checks regardless, because the checks are meant to be used to prop up small and local businesses and help with everyday expenses.
The only time a stimulus check could be taken by the trustee in a bankruptcy is if it is sitting in your bank account at the time of filing, and you do not have a so-called “wild card” exemption to protect the money in your bank account. Generally, cash and money in a bank account are not protected when you file, so it is important you talk to your attorney and try to file your case when your bank balance and cash balance are low.
Finally, what if you still have not received your checks? If that is the case, you can let the IRS know on your tax return this year. This is another way to get the benefit of the rebate. On line 30 of the 1040 form, there is a line called the Recovery Rebate Credit. This is where you will list any amount you are owed if you did not receive your check, or if you received less than you should have. The amount you have not received will either increase your tax refund or will reduce the tax you owe the IRS.
Online tax preparation services have begun to add this new step to their software, so if you prepare online, make sure you are asked if you have received all your stimulus checks. If you prepare by hand, the IRS has updated its preparation instructions to include this new credit. If you go to someone in person, they should be aware of this new rule and ask you about it. If you are in a bankruptcy, make sure to tell your attorney if you use the Recovery Rebate Credit, as it may affect how your tax refund is treated in your case.
If you have questions about bankruptcy or you need to know your options please reach out to our office and speak with one of our bankruptcy attorneys. We have bankruptcy offices in Wichita, Topeka, Lawrence and Overland Park.