Coronavirus CARES Act Stimulus Package & Bankruptcy
As the Coronavirus pandemic sweeps the US, the Federal government has moved to enact the CARES Act, an economic stimulus bill designed to prop up the US economy as businesses close, workers are furloughed, laid off, or outright fired, and as the stock market plunges.
The CARES Act contains provisions dealing with everything from unemployment benefits, payroll taxes, 401(k) loans, IRA and 401(k) distributions, use of retirement funds, small businesses, aid to state and local governments, agriculture, and more.
What is most of interest to many individuals is the well-publicized
direct payment benefit the Act contains, entitling Americans to receive a one-time direct payment deposit of $1,200, or $2,400 to married couples with an additional $500 for each child, so long as individual income does not exceed $75,000, or $150,000 for married couples.
Whether this Act has any long-term, structural benefit to the US economy or to individuals whose economic needs outlast the expenditure of a one-time payment that is less than sufficient for virtually anybody's household budgetary needs for even a month is highly debatable.
Regardless, for what it's worth, the drafters of the Act did foresee a few problems that these direct payments might cause for folks deciding to file for bankruptcy in the midst or aftermath of this tumult and included some protective provisions remedying those issues.
Provisions of the CARES Act Dealing with Bankruptcy Filings
The CARES Act does the following for individuals filing for bankruptcy after its enactment (note that this post does not deal with Chapter 11 bankruptcy matters for corporations, only Chapter 7 and Chapter 13 matters for individuals):
Amends the Definition of "Income" for Purposes of the Means Test
Why is this important?
The "Means Test" is a mathematical formula that, first, determines whether or not an individual filing for bankruptcy is eligible for a Chapter 7 bankruptcy based on household income.
If a person is NOT eligible for Chapter 7 bankruptcy, the Means Test also then determines whether or not that person must file a 3-year Chapter 13 payment plan or a 5-year plan AND whether there is some minimum payment amount that must be repaid through the Chapter 13 plan to the person's unsecured creditors.
In other words, the Means Test is a big deal.
The Bankruptcy Code defines the "income" that the Means Test calculates to include funds from nearly every source other than debt repayment, Social Security benefits, or, recently, Veterans Disability benefits.
These CARES Act payments will not, now, be included as "income" in the calculation of the Means Test, which would have (arguably) artificially inflated a person's actual income and potentially forced that person into a needless and unsupportable Chapter 13.
Confirms that Coronavirus Payments Are Not Included in "Disposable Income" for Chapter 13 Matters
In a Chapter 13 bankruptcy, a debtor is required to pay all "projected disposable income" into a Chapter 13 Plan for distribution to is or her creditors.
This is otherwise required by Section 1325 of the Bankruptcy Code. Much litigation has unfolded over the years as to what is and what is not "projected disposable income," and this provision clarifies, in essence, that these CARES Act payments do NOT need to be turned over to the Chapter 13 Trustee in an ongoing or subsequently filed Chapter 13 bankruptcy case.
If you are currently in a Chapter 13 bankruptcy, this is a very important point and should be discussed with your experienced Michigan bankruptcy attorney.
Permits People Currently in Chapter 13 Bankruptcy to Modify Payment Plans If Experiencing Coronavirus-Related Hardship
This may be a provision that falls into the "nice idea" stratum in that it simply allows debtors experiencing Coronavirus-related hardship to move for a modification of their Chapter 13 payment plan.
A modification in the Eastern District of Michigan is a motion of sorts, to which creditors and the Chapter 13 Trustee may respond or object. Generally, locally, if there is no objection, the proposed modification is approved.
If there is an objection or response, a hearing is scheduled to resolve the dispute.
This Section of the CARES Act simply allows Debtors to request a modification which doesn't appear to grant any further relief than was already available other than to extend the term of the Chapter 13 Plan out to as long as 7 years from the date of first payment.
Previously, the maximum length permitted under the Bankruptcy Code was 60 months, or 5 years.
This CARES Act provision does not state that such a modification must be granted or will be granted, only that the request is permissible.
Depending on the inclinations of the Chapter 13 Trustee in question, this may be an option which finds little traction in reality.
Further, the appeal of an even longer Chapter 13 process to most people involved in that sort of bankruptcy will be a less than thrilling prospect and will likely be of use primarily to those in Chapter 13 for the purpose of saving a home from foreclosure or similar purpose.
Livonia Michigan Bankruptcy Attorney: A Bottom Line with Regard to the Coronavirus CARES Act
The bottom line with regard to the CARES Act is that it is likely of short-term benefit to anybody and of limited use to those in bankruptcy. However, the Means Test and Chapter 13 income provisions were necessary.
All of these provisions sunset (expire) after a period of time. They will not continue to benefit bankruptcy filers indefinitely.
If the Federal government is going to hand out checks to people for assistance, the least it could do is ensure that, for those hardest hit, that money just doesn't end up in the hands of creditors.
As usual, the Federal government managed to accomplish the least here.
If you are considering filing for bankruptcy due to the Coronavirus or for any other reason, please contact us to discuss your matter or click here to directly schedule your initial bankruptcy consultation into our calendaring system.
Note that for the duration of the Coronavirus pandemic, The Hilla Law Firm is offering virtual consultations to bankruptcy clients via Zoom or telephone.