Coronavirus Stimulus Payments and Debt Collection Law
People who are overwhelmed by debt during the COVID-19 outbreak may be concerned about whether they can keep their stimulus check. This is a one-time economic impact payment issued by the federal government.
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of March 2020, the first stimulus payment consisted of up to $1,200 for eligible individual taxpayers and up to $2,400 for eligible married couples filing jointly, plus a $500 bonus for each child 16 or younger. These funds could be placed in each recipient’s bank account by direct deposit or sent by mail.
Under the Consolidated Appropriations Act of 2021 (CAA), signed on December 27, 2020, a second stimulus payment of $600 was distributed to eligible taxpayers. To qualify for the entire $600 stimulus payment, individuals must have earned less than $75,000 in 2019, and couples must have earned less than $150,000 in 2019. After these income thresholds, the payment was phased downward. Eligible taxpayers also received $600 per dependent child 16 or younger. For example, a family of four earning less than $150,000 received $2,400 total. These funds could be direct deposited or sent by mail.
Finally, the American Rescue Plan Act of 2021 (ARPA), signed on March 11, provides up to $1,400 for individuals earning less than $80,000 and up to $2,800 for joint filers earning less than $160,000. To qualify for the full amount, an individual would have to report income of $75,000 or less ($150,000 or less for joint filers). Some dependents, including full-time students younger than 24 and adult dependents, may be eligible as well. Again, these funds are expected to be sent through mail or direct deposit starting in mid-March.
Can Creditors Access Stimulus Payments?
The CARES Act does not protect stimulus checks from seizure by creditors or debt collectors. This applies to stimulus payments from the spring of 2020 under the CARES Act, even if a CARES Act stimulus payment was not received until 2021. If the funds have been placed in a bank account, a creditor or debt collector may be able to seize them through a levy or garnishment before the debtor withdraws them. Thus, some debtors may choose to promptly withdraw their stimulus check funds from their bank accounts to cover essential expenses and record the items for which they used them. Note that a handful of states have instituted protections that prohibit debtors from seizing stimulus checks.
The CAA protects stimulus payments from garnishment in some instances not previously protected by the CARES Act. Stimulus payments made under the CAA cannot be garnished for child support, private debt collection, or federal debts. However, banks may still use stimulus payments to cover an amount owed on an overdrawn account. Some banks have pledged not to take stimulus payments to cover bank debts, but recipients should reach out to their bank directly. Stimulus payments also may not be immune from withdrawal by creditors or debt collectors if an automatic payment plan has been authorized.
Of note, ARPA does not protect stimulus payments from garnishment by private creditors, as the CAA did. However, ARPA payments are protected from garnishment by the IRS and government agencies, such as child support agencies.
Recipients of Social Security benefits may be able to protect their stimulus checks if the IRS places them in accounts dedicated to Social Security benefits. These accounts are generally shielded from collection efforts.
When a Levy Happens
Certain types of debt expose a debtor to a levy or garnishment of their bank account without prior court action. Common examples include tax liens, student loans, and debt owed to the financial institution that holds the account. Other types of debt, such as credit card debt, rent, and medical debt, cannot result in a levy or garnishment unless the creditor sues and receives a money judgment against the debtor. If you are not sure whether you have a money judgment against you, you can check court records and credit reports. If you find an old judgment against you, it may no longer be enforceable unless the creditor has renewed it.
Sometimes a creditor might fail to comply with the statute of limitations in suing to collect a debt. This means that the creditor took too long to sue under the laws in your state. You can ask the court to dismiss the case if the creditor violated the statute of limitations.
If a creditor has already seized your stimulus check through a levy on your bank account, you can potentially object to the levy. This requires prompt action, since most states require a debtor to object within 10 days or even sooner. An objection might claim an undue hardship or argue that state law exempts the funds that were levied from collection efforts.
Stimulus Payments and Bankruptcy
Debtors who find that they need to file for bankruptcy may lose their stimulus checks during the Chapter 7 or Chapter 13 process. Receiving these payments does not affect your eligibility to file under either chapter, but no federal exemption covers stimulus payments. States also have not created specific exemptions for these checks. You may be able to apply a cash exemption, a public assistance exemption, or a wildcard exemption to the stimulus payment. If no exemption covers the payment, however, or if you use applicable exemptions for other assets, you probably will need to relinquish the payment.
A bankruptcy trustee in a Chapter 7 case can collect the stimulus check and distribute it to creditors, while a trustee in a Chapter 13 case can require a debtor to include the amount in their repayment plan. A trustee has an incentive to collect a stimulus payment because they are paid a percentage of the assets that they recover from the debtor. (The U.S. Trustee Program does not endorse this behavior, but it also does not require trustees to allow debtors to keep the checks.)
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