Protecting Your CARES Act Stimulus Check From Debt Collectors and Bankruptcy

If you’ve fallen behind on bill payments—or suspect that you might soon—you certainly don’t want to lose your CARES Act stimulus check to debt collectors or in a bankruptcy case. In this article, you’ll learn how to protect your stimulus check from creditors so that it’s available to purchase the things you and your family need.

If you live in California, be sure to read about protecting a CARES Act stimulus payment and bank accounts in California.

Creditors Can Seize CARES Act Stimulus Payments

The CARES Act didn’t include a provision to protect stimulus payments from debt collectors or creditors in bankruptcy, so there’s good reason to worry. The Internal Revenue Service (IRS) intends to use direct deposit to distribute economic impact payment funds when possible. However, like other unprotected funds, once placed in a bank account, stimulus payments are subject to seizure.

While it’s conceivable that a savvy judgment creditor might intentionally place a levy on a bank account (also called a garnishment in some states) before a recipient can withdraw funds, it’s even more likely to happen due to bad timing. Struggling debtors might lose the funds to creditors who were already in the process of taking collection actions.

Important Tip. Social Security benefits are protected from most creditors when deposited in a dedicated account not used for other types of funds (intermingling funds creates a tracing problem that makes proving the protected status challenging). If you aren’t required to file a tax return because you’re a Social Security benefit recipient, and the IRS automatically deposits your economic impact payment into the dedicated account, you’ll have a better chance of claiming that creditors don’t have the right to the funds. Learn more about Social Security direct deposit protections.

Could You Lose Your Economic Impact Payment?

Fortunately, most creditors can’t take money from your bank account just because you’ve fallen behind on a payment. But some can.

For instance, if you have a tax lien, you’ll likely lose the deposited funds. And the Department of Education can take action to collect student loans without first going to court.

Also, if you bank with the same institution that issued your credit card or a car loan and you’re behind on the payment, the bank can use a “set off” clause in your credit contract to take money out of your account and apply it to the past-due obligation.

However, some creditors holding unsecured debt must first sue you in court and obtain a money judgment before levying your bank account. Examples of unsecured debt include past-due rent, credit card balances, medical bills, and personal loans.

Finding Out If a Creditor Has a Money Judgment

Most people know whether a creditor has a money judgment against them, but it’s not always the case. Here are a few ways you can find out.

• Check your credit report. You’re entitled to one free copy per year from each of the three major reporting agencies at annualcreditreport.com.
• Research court records for judgments. If you find one, check whether it’s too old to enforce (they’re only good for so long). If it is and the creditor hasn’t renewed it, you’ll be in the clear.
• Check for liens. In some states, creditors must “perfect” lien rights—or establish their ownership interest in property until a debt is repaid—by filing the court judgment in the recorder’s office or with the secretary of state (this also occurs with mortgages). If you find a money judgment lien, you’ll know you have a creditor who means business.

Important Tip. Creditors have a limited amount of time to file a lawsuit against you under laws called “statute of limitations.” If a creditor files an action after the limitation period expires, you’ll have to ask the court to dismiss the case by filing a motion—statute of limitation dismissals don’t happen automatically.

How to Protect Your Stimulus Check From Creditors

You’ve likely already thought through the most obvious way to protect your economic recovery payment—but you’ll want to protect yourself, too. Here are the steps.

• Opt for a mailed stimulus check when possible and cash it.
• Withdraw any stimulus payment deposited into your bank account as soon as possible. If a levy is in place before you make the withdrawal, you could lose your money (find out your options below).
• Spend the cash on necessary items, such as food, utilities, rent, or mortgage payment, and keep good records.

If the IRS already has your account information, you can expect a direct deposit. You can check using the IRS “Get My Payment” tool. If it prompts you to provide your bank account number, but you’d prefer a paper check, don’t supply it.

Important Tip. Purposefully depriving creditors of payment can be fraudulent. However, you’re entitled to use your assets to provide basic life needs for you and your family. Plus, the purpose of stimulus payments is to lessen the financial impact of the coronavirus outbreak—not to pay down creditors. So while it’s unlikely that you’ll run into a problem, keeping good records will help.

Also, history has shown that when collecting gets harder, creditors become creative. So stay transparent.

What to Do If a Creditor Seizes Your Economic Recovery Payment

A creditor with an established a levy on your account might get the funds before you can act. You’ll still have recourse. Every state has a procedure in place you can use to object to a bank account levy. Typically, you’ll file an objection asserting undue hardship or that a state exemption law protects the funds from the levy. A state court judge will decide the matter at a hearing.

Your local sheriff or marshall will likely have the necessary paperwork, and many courts have self-help centers that can assist you. But act quickly. You’ll probably have to file within ten days or less, depending on your state law.

What Will Happen to Your Stimulus Payment in Bankruptcy

In bankruptcy, you don’t lose everything you own. You can protect property covered by your state exemption laws (or under the federal exemption scheme if your state allows you to choose between the two plans).

Because the CARES Act doesn’t exclude stimulus payments from the property included in a bankruptcy or create an exemption to protect stimulus payments, filers are left to rely on existing exemptions. If your state provides an exemption that covers the stimulus payment, you’ll be able to protect it in bankruptcy. Otherwise, you’ll likely have to surrender it.

Currently, state-specific CARES Act stimulus payment bankruptcy exemptions don’t exist. However, some states offer a cash exemption (although these are rare and often cover only a few hundred dollars) or a wildcard exemption that protects any asset of the filer’s choosing. A liberal state might allow a debtor to use a public assistance exemption.

If you can’t protect your stimulus payment with an existing bankruptcy exemption, the bankruptcy trustee appointed to administer your case could do one of two things:

• In a Chapter 7 case, demand that you turn over the funds for disbursement to creditors.
• In a Chapter 13 case, require you to pay the stimulus amount to your creditors as part of your Chapter 13 repayment plan.

While the U.S. Trustee Program office does an admirable job of making clear that it doesn’t support trustees taking stimulus payments, it also acknowledges that the CARES Act doesn’t address stimulus payments in the context of bankruptcy property. Essentially, the law is unchanged. And because bankruptcy law tasks trustees with recovering funds for creditors, and because trustees get paid a percentage of distributed assets, filers should expect trustees to administer (take) nonexempt stimulus payments.

Important tip. If you anticipate receiving a stimulus check, you might want to consider waiting to file for bankruptcy until after spending your stimulus recovery on necessary purchases.

Learn how bankruptcy can help after a layoff or how to file for bankruptcy while quarantined during the coronavirus outbreak.

Talk With a Local Bankruptcy Attorney

Because the CARES Act is a new law and courts have yet to weigh in, its strongly recommended that you consult with an experienced bankruptcy lawyer familiar with local area practices and your particular case.