A common concern of people already in bankruptcy and people thinking of filing bankruptcy is the status of the stimulus payments resulting from Congress’ passage of the 2020 CARES Act and the more recent American Rescue Plan Act (ARPA). People are concerned the money will be taken by the bankruptcy trustee to pay creditors. Fortunately, Congress anticipated that concern and inserted language in the laws preventing stimulus payments from being taken by a trustee. The laws specifically say stimulus payments (also known as “recovery rebates”) are not property of a bankruptcy estate, meaning they aren’t even an asset a trustee can reach. That also means it’s not necessary to use a debtor’s limited personal property exemption to protect the payments.
The laws also say the stimulus payments aren’t disposable income in a Chapter 13 bankruptcy, meaning they aren’t used to calculate how much debtors need to pay the trustee each month. The same is true for the increased child tax credit payments made possible by ARPA. By allowing Chapter 13 debtors free access to these stimulus and child tax credit payments, Congress gave a significant boost to debtors’ ability to complete their Chapter 13 plan.
In addition to the favorable treatment of stimulus payments in bankruptcy, ARPA also contained a provision making federal student loans discharged for any reason after December 21, 2020 and before January 1, 2026 not subject to taxation as income. Treating discharged or forgiven loans as income significantly reduces the benefit of discharging debt. This provision puts debtors who have student loans discharged under an income based repayment program on the same footing as those who have student loans discharged because of a disability. The provision also applies to debtors who have their private student loans forgiven by lender. Excluding forgiveness of student loan debt from taxable income creates more opportunities for the thousands of debtors trying to get out from under the overwhelming burden of this debt.