The good news for people who have received their $600 per person and $600 per under-18 dependent child stimulus payments approved in late December: The legislation providing for these payments specifically excludes the payments as property of the bankruptcy estate, so you will not need to turn over the funds if you’ve received them. This is comforting, since the purpose of the payments, however modest, is to allow for people to survive during the pandemic.
However, there are still some actions you should definitely not take with the stimulus funds if you’ve received them but still may need a bankruptcy.
DO NOT…..pay large sums of money to your family members or other “insiders” like fiancées, boyfriends/girlfriends, etc. If you receive $2400 and turn it all over to Dad, then file for bankruptcy protection, there still could be a demand by your bankruptcy trustee to Dad to turn over that money as a “preference” payment to an insider. Those payments within one year of filing can be recovered if they exceed $600 in a regular consumer case. That means you can give small amounts to family, but the best practice is to wait until after your bankruptcy is over (usually 3-4 months from filing for simple Chapter 7 cases) to repay that family member.
DO NOT…pay large sums of money to unsecured creditors (with the possible exception of student loans). There are far better uses for the money you receive. Investing in retirement accounts, spending it down on necessities (car repairs, small furniture, catching up with utilities). But you should not be making payments of more than $600 to any unsecured creditor in the 90 days before filing your case. Even if you’re not planning to file for bankruptcy now, things could change quickly if you find yourself garnished by a judgment creditor or otherwise threatened with collection actions. Talk to us about who you should and shouldn’t pay.
DO . . . prioritize payments to secured creditors like auto lenders and mortgage lenders instead of accepting questionable “forbearance” paperwork. You should have a lawyer review any proposed forbearance to make sure it won’t simply be kicking the can down the road and forcing you into a bankruptcy months later to repay the accumulated arrearage.
DO . . . make sure all of your prior income taxes are timely filed (state and federal) along with any past due domestic support obligations like child support, alimony, or maintenance.
Note: Much of the same advice applies to tax refunds, which will be a topic for another day.
If you are or will be receiving stimulus money and that money won’t resolve your financial distress, call or visit our website at www.kansascitybankruptcy.com to set up a free initial consultation and discuss how to manage these funds so they don’t cause problems in the future. At W M Law we are … here to help.