I get a lot of questions about stimulus payments and tax refunds in the context of filing bankruptcy. I felt it would be a good idea to discuss it in a thorough post.
The question here is whether a person may keep certain funds after they file bankruptcy, in this case, a tax refund or a stimulus check or both?
The answer to this question is found in the exemption laws of the bankruptcy code. Exemption laws are those laws or statutes that explain what assets a person can protect from creditors when they file for bankruptcy. Arizona exemption laws are applied to any bankruptcy case where the Debtor (the person filing the case) has lived in Arizona for 2 consecutive years prior to filing. If the Debtor has not lived in Arizona for 2 consecutive years prior to filing, a different analysis would apply. But we will assume for the purpose of this post that Arizona exemptions apply.
Money owed to the debtor:
Money owed to the Debtor at the time the bankruptcy is filed is usually property of the estate (which means you have to turn it over for the benefit of your creditors), unless there is a specific exemption to protect it.
This would mean that if you loaned a friend 5K last month and filed bankruptcy today, your friend now owes the bankruptcy estate 5K so that the bankruptcy Trustee can distribute it to your creditors.
This would also mean that if you were in a car accident last month and file bankruptcy today and then receive a settlement 6 months from now, that money is property of the bankruptcy estate.
How are tax refunds treated in Arizona?
Tax refunds are not exempt in Arizona, under Arizona exemptions. They are treated as money owed to you at the time of filing. Interestingly, tax refunds are calculated as being owed to you based on the number of days that have passed of the tax year in question at the time of filing. For example, all of 2020 has already passed, so if you filed bankruptcy today, the entire 2020 refund would become property of the bankruptcy estate. Additionally, 31 days of January and 18 days of February (the date of this post) would mean that 49/365 of your 2021 tax refund are also property of the bankruptcy estate (though your trustee would likely waive that).
So when it comes to tax refunds and bankruptcy in Arizona, the idea is to get that tax refund and talk with your bankruptcy attorney on how to properly spend it prior to the filing of the bankruptcy. Food, rent, mortgage, car payments, and so on are all appropriate expenditures. Though it sounds self-serving, attorney fees for bankruptcy are also appropriate.
What About Stimulus Checks?
It’s important to understand that I’m speculating here because there is actually no bill passed yet on the stimulus checks. But previous stimulus checks were treated as exempt from bankruptcy.
In the past, if the Debtor filed bankruptcy and had not yet received their stimulus check, the bankruptcy trustee did not claim that check for the estate. That was good. There was also language in the actual bill that suggested the checks were exempt as well.
But, if the Debtor had received and deposited the check in their account and then filed bankruptcy, the Trustees argued (or could argue) that because it is now cash in a bank account and likely co-mingled with a paycheck or other money, it is no longer exempt. In Arizona, you are only protected for up to $300 in your bank account on the day of filing.
What is the Best Strategy?
If I had a client come in today who was expecting a tax refund in a few weeks and was also hoping for a stimulus check by the end of March or in April as they predict, my advice to them would be this:
File your tax return quickly. Get your tax refund from the IRS (do NOT get a rapid refund on a card. This is a loan, not your actual refund and can cause all sorts of problems). Deposit that tax refund in the bank and then spend it appropriately (be sure to consult me for the best ways to do this). Catch up on your rent or mortgage. Catch up on your car payment. Buy your family some groceries. See the dentist. And so on.
Then, if you have overwhelming debt and no other options, use the D.M. Bankruptcy Law Group, LLC to file your bankruptcy and resolve your debt issues before you get the stimulus check.
That is the best approach. Another approach could be to receive your stimulus check and immediately segregate it in another, separate account and never co-mingle it. This is not as good of an approach as the first though.
Finally, it is important to remember that because the bill isn’t final yet, this round of stimulus checks may not have any exemption to them at all. So if you need to file bankruptcy, filing BEFORE the bill is passed would ensure you were not “owed’ this check prior to filing.
Obviously, this issue is only a small part of reasonable and necessary bankruptcy planning. Do not go this alone. We offer FREE CONSULTATIONS from your phone or zoom or in person if you prefer.
DISCLAIMER: None of the content in this post shall be construed as legal advice to you, the reader, and no attorney / client relationship is formed by reading this post.