When Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 28, 2020, nearly everyone had questions about what the act contained. For bankruptcy professionals, there were two primary questions:
- Would the money be counted in calculating a debtor’s income?
- Would the money be part of the bankruptcy estate and subject to seizure by a Trustee?
See, income is one of the five pillars of consumer bankruptcy. If you make a lot of money, you may be ineligible to file a Chapter 7 bankruptcy. I’m talking about the Means Test, of course, which really requires its own article.
But for the moment, understand that an influx of money, like bonuses, commissions, or lottery/gambling winnings, is something bankruptcy attorneys have to account for. Naturally, we were curious about the rebate in the CARES Act.
Is the money considered income?
Fortunately, the Act answers the question and says, “No, any money received under this Act is NOT income under either chapter.” As an aside, it’s so nice when a law or statute or act is so clear. So, that’s that: any rebate (stimulus) you receive (or have received) will not be considered in your bankruptcy.
Awesome. What about the title of the post: Will I lose my Coronavirus Rebate if I file bankruptcy? What if you have the rebate money sitting in your bank account – will you have to give it to a bankruptcy Trustee?
Before I answer that question, let me briefly explain why this is important. When you file bankruptcy, you list all of your property – both real property (like your house) and personal property (like your household goods, cars, accounts, etc.). You also list exemptions that are used to protect your assets. In nearly all cases, the exemptions completely protect the individual’s assets.
But sometimes an asset can’t be protected – either because someone already has too many of them (e.g. 10 cars) or because the asset is just incredibly valuable (like a Picasso hanging on your wall).
This is a rare situation (and a good bankruptcy attorney will identify it at your first meeting). But if there is a non-exempt asset, a Chapter 7 Trustee might sell it, pay co-owners their share (if any), pay costs of sale, and then pay your creditors. Fair enough.
In a Chapter 13, you get to keep the asset, but your Chapter 13 plan must pay its value to your unsecured creditors. Think of it as buying the non-exempt asset back from the Trustee.
Again, this topic – assets and exemptions – deserves its own article, but for right now, just know that having a bunch of cash in your bank account could be an issue if you file bankruptcy. And, again, be sure you meet with an experienced, hands on bankruptcy attorney, who can identify potential issues like this.
What about the rebates?
Back to the rebates: bankruptcy attorneys wanted to know if Trustees could take rebates from the CARES Act. In this case, the Act doesn’t address this question, which means the rebates could be at risk of seizure by the Trustee.
I’ll tell you something, though. When the Act first came out and clients asked me about the rebates, I said, “Listen, there is nothing in the Act about this issue, whether the rebates are exempt or not. But things are crazy right now – I’d be shocked if any Trustee made a move on this.”
And guess what! Yesterday the Department of Justice, through the US Trustee (who oversees bankruptcies) issued a notice to Chapter 7 and Chapter 13 Trustees regarding these rebates. The notice addressed both questions – about the rebate as income and about the rebate as an asset.
The notice said that regardless of whether that money is or is not property of the bankruptcy estate, the US Trustee expected it to be “highly unlikely that [a] trustee would [take] the payment after consideration of all relevant circumstances.” The notice also said that trustees should notify the US Trustee directly if they were going to try to take a rebate.
In other words, the US Trustee is saying, “Yes, we know the Act doesn’t provide a specific exemption for the rebate. But don’t take it. And if you are thinking about taking it, talk to us first (so we can tell you not to take it).” I added that last part, but you get the idea.
There you have it, more or less. What am I telling my clients? I’m telling them that the Trustee is not going to take their refund, that this is an unprecedented situation and that they should keep or use it for themselves. We’ll risk a rogue Trustee ignoring the US Trustee’s suggestion and fight that fight if need be.