How to Protect Your Stimulus Checks in Bankruptcy

You don’t lose everything when filing for bankruptcy. But until recently, federal exemption laws didn't protect stimulus funds and benefits in bankruptcy. Now, however, you can use the new “recovery rebate” exemption to protect your money in some instances—but you’ll need to know the details. In this article, you’ll learn:

• how exemptions protect property
• the law you’ll use to protect your stimulus benefits, and
• what to do if you run into a problem.

Exempting Stimulus Checks and Recovery Rebates in Bankruptcy

Most people start by reviewing their state’s bankruptcy exemptions to see if they can protect all of their property. But filers can use the federal nonbankruptcy laws, too. That’s where you’ll find the exemption law for “recovery rebates.” Stimulus checks are part of the recovery rebate received under the American Rescue Plan Act of 2021 and the CARES Act.

If you’re entitled to receive a stimulus check, tax credit, or child credit, and haven’t received it yet (and spent the money), the law you’ll use to exempt it on Schedule C: The Property You Claim as Exempt (individuals) is as follows: 11 USCA § 541(b)(11). Learn more about filling out bankruptcy forms.

Potential Problems Protecting Stimulus Checks in Bankruptcy

New laws are sometimes difficult to interpret, and this law falls squarely into that category. While it is clear that the law protects stimulus checks and recovery rebates issued during 2020, it’s not clear whether the law extends to stimulus payment received after 2020.

The Office of the U.S. Trustee has taken the position that the new law covers the first three stimulus checks and recovery rebates issued, including the two issued in 2020 and one in 2021. But the U.S. Trustee’s extension of the law to 2021 is based on an assumption, not a straightforward reading of the law—an observation supported by the fact that the U.S. Trustee has instructed bankruptcy trustees to contact the U.S. Trustee before taking stimulus funds.

So if the law isn’t as straightforward as everyone would like, what are the takeaways? Consider the following:

• Spend your stimulus funds on necessary items such as food, clothing, utilities, and rent before filing for bankruptcy, when possible.
• If you must file for bankruptcy before you’ve received your stimulus benefits, protect your funds using 11 USCA 541(b)(11).
• Watch for updates on the law—future clarification is likely.
• If a bankruptcy trustee attempts to take stimulus funds or benefits, contact the U.S. Trustee and refer to the March 25, 2021 guidance published by the Office of the U.S. Trustee.