Helpful Bankruptcy Law Change

The 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. Some outlets report that this is the longest single bill that Congress has ever passed. 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 Provide Some New Help and Changes for those seeking Protection Through Bankruptcy Law

The US Trustee’s office will enforce protections for the $600 pandemic “economic impact payments” when you file bankruptcy.

When filing a bankruptcy case you generally get to keep what you own at the time you file the case. Legalistically, the bankruptcy estate includes just about everything you own. 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. Basically, this property does not fall under the jurisdiction of your bankruptcy case. It doesn’t need an exemption to protect it. When the Code legally defines property 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 it clear that they are NOT the property of the estate. Specifically, the Cose includes “recovery rebates” in the list of property that’s not the 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 have it now or will receive it later.

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 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. The CARES Act may protect these payments. 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).

Coronavirus Aid, Relief, and Economic Security Act (“CARES”), Section 1113(b)(1)(A).

The same continuing national emergency related to the pandemic is responsible for the $600 “economic impact payments.” 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). Congress enacted CARES 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 Congress will extend this deadline. 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.