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Is the new stimulus protected from creditors? Can it be protected in a bankruptcy?  

On Behalf of | Mar 16, 2021 | Bankruptcy, Firm News


The short answer is yes, the new federal stimulus is almost certainly protected from creditors outside of bankruptcy, or inside of bankruptcy. The reason I can only say “almost” certainly, has to do with a more complicated analysis of federal law versus state law, the way that Congress has denominated the various stimuli, including whether they are property of a bankruptcy estate, as well as treatment in Chapter 7 versus chapter 13.

Is it protected outside of bankruptcy?

When they did the first stimulus (CARES Act) in March of 2020, they rushed that through and didn’t think about questions like this. So Governor Walz issued an order, and decreed that the stimulus was exempt from creditors under Minnesota law, because it is government assistance based on need. So that basically protects these funds while in the bank, or if a person needs to utilize Minnesota exemptions when they file bankruptcy. Meanwhile, the United States Trustee issued an advisory edict, indicating that even if these stimulus payments are property of a bankruptcy estate, they are of negligible value, and it basically said that Chapter 7 trustees would need to get permission from their supervisors before trying to take someone’s rebate. In other words, they knew it would be bad press & politically untenable, so they were highly discouraging it. In chapter 13 plans, our local trustees did not take a specific position, but their unofficial policy was not to consider these stimulus payments as additional disposable income.

Is the stimulus rebate property of a bankruptcy estate?

The Consolidated Appropriations Act of 2021, passed into law December 27, 2020, contained the second stimulus payment of $600. That bill specifically provided that any stimulus payment that Congress may enact within the next year, would be excluded from a bankruptcy estate, not included as income in chapter 13 plans, and also indicated that under federal law, the stimulus payments could not be touched by any creditors. So the exclusion from the bankruptcy estate still applies to the most recent a stimulus, however, the most recent stimulus did not have a similar provision protecting it from creditors outside of bankruptcy. While the lack of that provision may be relevant in other states, in Minnesota, we still have the governor’s order indicating that the (last) stimulus is exempt from creditors, and to the extent it’s arguably not applicable to the most current stimulus, I would expect he will soon so clarify.

To the extent the recovery rebate stimulus is property of a bankruptcy estate, for a person who can protect their assets under federal exemptions, it is exempt as long as it’s within the $14,000 miscellaneous exemption limit, regardless of whether it has been received.

There are a few other provisions in the most recent stimulus package, including child tax credits, and earned income tax credits, some of which may be payable over the course of the year, and some of which may show up on your 2021 tax refund. It is still unclear whether those benefits might be property of a bankruptcy estate, but if they are, they would appear likely to be deemed exempt under state law, And also under the federal exemption as long as it’s within the limit.

While I can’t give advice that a person can rely and act upon in a blog post, I can tell you this: if you are considering bankruptcy, the biggest no-no you could do, would be to pay debts back to relatives before filing. A lot of people are finding that the stimulus is nowhere near enough to put a dent into their debts, and are utilizing it toward bankruptcy fees. If you owe money to relatives, you are free to do that after you file.

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