2021 COVID-19 Stimulus "Recovery Rebate" Bankruptcy Exemption

By , Attorney

Protect stimulus payments, tax credits, and child credits in bankruptcy with the new recovery rebate exemption.

According to the March 25, 2021 guidance published by the Office of the U.S. Trustee , a new bankruptcy "recovery rebate" exemption protects the three stimulus entitlements received under the American Rescue Plan Act of 2021 and the CARES Act to date. (11 USCA § 541(b)(11) effective December 27, 2020.) The exemption covers advanced tax credit payments (or "stimulus payments"), tax credits, and child credits received under both Acts.

What Is a Recovery Rebate?

A recovery rebate includes the lump-sum stimulus payments individuals and children received to offset financial challenges presented by the coronavirus pandemic and any unused portions of the tax credit. But a stimulus payment is actually an advance payment of a tax credit or "recovery rebate" created by the American Rescue Plan Act of 2021 or the CARES Act.

If the advanced payment is less than the entitlement amount, the unused portion can be claimed on the next tax return. (26 USCA § 6428.) For instance, a single mother of two who received $1,200 instead of $2,200 could claim the remaining $1,000 on her tax return. Because the unused portion of the tax credit is also protected as a "recovery rebate," the mother wouldn't have to worry about losing it if she filed for bankruptcy before receiving her next tax return.

Find out what happens to tax returns in bankruptcy that aren't covered by a recovery rebate exemption.

Claiming the Stimulus Recovery Rebate Exemption in Bankruptcy

Although the recovery rebate exemption is a federal nonbankruptcy exemption, filers using state exemptions can also claim it. Learn more about assets you can keep in bankruptcy in Bankruptcy Exemptions by State.

For more information about the recovery rebate exemption, read How to Protect Your Stimulus Checks in Bankruptcy.

Effective date: December 27, 2020