Stimulus rebate / tax refund - What happens to it in bankruptcy?

[phoenyx]

Many bankruptcy filers are wondering whether they will be able to keep the stimulus payment being sent out by the IRS in the next few months. Unfortunately, no one knows yet. This thread contains answers to some of the frequently asked questions about the stimulus payments, and should contain the discussion that will inevitably happen regarding this issue.

Background on the stimulus payment

The Economic Stimulus Act of 2008 ("ESA2008") created what people are right now referring to as the "stimulus payment", or even the "tax rebate". The stimulus payment is intended to quickly get cash into the hands of eligible taxpayers, so they can spend it to attempt stimulating the economy. For more information, you can visit this IRS webpage.

Question: How much will my stimulus payment be?

The stimulus payment for eligible taxpayers can range from $300-$600 for single tax filers, or from $600-$1200 for married tax filers (filing jointly.) The stimulus payment for eligible taxpayers also includes $300 per qualifying child. The stimulus payment can also be zero. Actually calculating a taxpayer's stimulus payment is beyond the purpose of this post, but you can visit the IRS Stimulus Payment Calculator.

Question: If I'm not eligible for the stimulus payment on this tax return, do I get it on next tax return?

Yes! This IRS webpage says if a taxpayer isn't eligible for the stimulus payment based on their tax return covering 2007, they will receive it next year if they are eligible for it based on their tax return covering 2008. Note that each taxpayer only gets one stimulus payment. You can't get one both this year and next year.

Question: Doesn't that mean if I receive the stimulus payment now, that I will owe it back next year?

No! This is a rumor going around, but it simply isn't true. Yes, the stimulus payment is an advance credit and refund on the tax return everyone will be filing about a year from now. But, since you are getting not only a refund check but also a credit on your taxes, they net each other out. If you receive the stimulus payment now, you aren't going to owe it back next year, and you won't owe more taxes next year.

Question: When will I receive my stimulus payment?

This IRS webpage will tell you when the IRS will send your stimulus payment, depending on the last two digits of your Social Security Number and whether you asked for direct deposit or a check to be mailed.

Question: Will my trustee take my stimulus payment, that I receive after I file?

The earliest a stimulus payment could be received is on May 2, 2008. Since no stimulus payments have yet been sent, it is impossible to predict now how it will be treated in a bankruptcy. Even bankruptcy attorneys just don't know yet. We don't know yet whether trustees will try taking it, or whether it will vary between each bankruptcy district.

Additionally, your stimulus payment may be small enough that even if your trustee thinks they can take it, they might not bother.

Question: Why can a trustee take a tax refund I receive after I file?

In many bankruptcy districts, trustees view tax refunds as being increasing owned during the tax year the refund is for. For example, many trustees view a tax refund received in mid 2008 based off the filing by April 15, 2008, as being increasing owned during 2007. This makes sense because the tax refund is really income earned in the previous year that the government held onto, but is refunding since they are not entitled to keep it. If the tax refund is not exempted, it's fair game for the trustee to seize the tax refund, just like any other previously earned and non-exempt income.

Argument for stimulus payment being "hands-off", if received after you file

In my opinion, if your receive a stimulus payment after you filed bankruptcy, a trustee should have at most the same claim to the stimulus payment as they would on any tax refund covering the year 2008 -- which would be refunded mid next year based on the tax return filed by April 15, 20099. I don't think trustees should be able to treat the stimulus payment the same as any tax refund covering the year 2007, which will be refunded in the next few months based on the return filed by April 15, 2008.

Therefore, in my opinion, a trustee should at most be able to seize a percentage of your stimulus payment based on when you filed your bankruptcy. For example, if you filed in late March, 2008, I think a trustee should at most only be able to seize 3/12 of your stimulus payment. However, if you file in late December, 2008, I think a trustee should be able to seize all of your stimulus payment, if it's not exempted.

If a trustee treats it this way, they are very unlikely to seize a small percentage of your stimulus payment because it just wouldn't be worth their time.

Question: Will my trustee take my stimulus payment, that I received before I filed?

As mentioned before, no stimulus payments have yet been sent. It's impossible to predict now how it will be treated in a bankruptcy.

A trustee may treat the stimulus payment received before you filed as the same as a tax refund received before you filed. If this happens, you can officially keep the stimulus payment or tax refund if it's already spent on ordinary expenses (nothing luxurious), if it's exempted, or if you convert it into an exempt asset.

Even if your stimulus payment is not exempted, it may be small enough that a trustee might not bother taking it.

Additionally, it's possible (although I think unlikely) that a trustee wouldn't try taking an unspent and non-exempt stimulus payment already received, since it's intended to be received by taxpayers and spent to help the economy, rather than just be given to creditors.

Question: Can the IRS keep my stimulus payment if I owe certain types of debts?

The stimulus payment is being treated the same way as any IRS refund, for the purposes of the IRS keeping it from you. The IRS will offset any refund it issues you toward outstanding tax and certain non-tax liabilities, rather than actually issuing you a check.

Debts that the IRS will offset any refund (including the stimulus payment) against include past-due: taxes to the IRS, taxes to your state, child support, alimony, student loans, certain fines/penalties/court fees, overpayments of federal benefits, and other debts to federal agencies.

If the IRS offsets your stimulus payment against an outstanding liability, the good news is most of the debts the IRS offsets against isn't dischargable in a bankruptcy anyway. So, even though you won't receive the cash, you are likely still receiving a benefit from the stimulus payment, even if it's only reducing your post-bankruptcy remaining debt.

[phoenyx]

(reserved for future use)

[HHM]

We have several threads floating around about the rebate. Since the questions are basically the same, Phoenyx took the initiative to consolidate what we know, and what think about the rebate and BK.

Feel free to post your comments and question here as it regards the rebate so we can keep all the questions regarding this issue centralized.

My take is that the trustees will probably be hands-off. In the grand scheme of things, the amount of the rebate is not that great (I think something like $600 for single, $1,200 for married, and +$300 per kid). Also, I think trustees realize that the rebate would be litigated, so the cost/benefit of doing so for a ONE time rebate event, is probably not worth it.

Also, I think there would be a PR backlash if a trustee did try to take it. I know if I was an attorney, if the trustee tried to take the rebate, I would be calling the local news.

Your best course of action would be: if you can exempt it, and don't need that exemption for something else, then you should list the rebate as an asset and exempt. If you cannot exempt it, I would not do anything (don't list it) and see what happens.

[my4devils]

Thank you Pheonix for consolidating all of the information- very helpful. We were concerned about the rebate- as we stand to get back 2400. Our attorney believed that our trustee would not be taking rebates but our was exempted just in case. I hope that all of us who need every penny to rebuild our lives are able to keep the rebate.

[Cali]

The IRS will begin sending out the first of 130 million economic stimulus checks May 2. When you get yours depends on your Social Security number.

By MarketWatch

The exact date you receive a stimulus check will depend largely on the last two digits of your Social Security number.
More than 130 million stimulus payments will be sent out starting May 2, on a staggered schedule based on the last two digits of taxpayers' Social Security numbers, the Internal Revenue Service announced this week. On jointly filed returns, the mailing schedule will be based on the first Social Security number listed, the IRS said.

For taxpayers who file by April 15 and get their tax refunds deposited directly into a bank or other financial account, the IRS will send stimulus payments from May 2 through May 16. For taxpayers who file by April 15 but don't choose direct deposit, the IRS will mail checks from May 16 through July 11.

Procrastinators, take note: For stimulus payments to be part of this delivery schedule, the IRS said tax returns must be "processed" by April 15, not "filed." That implies that a later timetable may apply to taxpayers who mail their returns on or close to April 15, leaving little time for the returns to be processed by that date.

If you expect a tax refund and choose to directly deposit it into two or three separate accounts, the IRS will send your stimulus check in the mail. (To have your refund sent to more than one account requires you fill out Form 8888. See this IRS page for more information.)

If you owe taxes and are sending a payment to the IRS with your return, you can still have your stimulus payment deposited directly into a bank or other account, the IRS said. Simply fill out the appropriate section on your return related to direct deposit, detailing your account information. See this IRS page for FAQs on stimulus payments.

If you do owe taxes, be sure to fill out your return and send payment as usual. That is, don't try deducting your expected stimulus payment from your tax bill. If you don't pay your tax bill by April 15, you likely will owe interest and penalties, said Anthony Burke, an IRS spokesman.

However, if you have a past-due federal or state income-tax bill or some other type of past-due federal debt such as student loans or child support, your stimulus payment likely will be reduced by what you owe.

This is the stimulus payment schedule for tax returns processed by April 15, the IRS said:
Direct-deposit payment

If the last two digits of your Social Security number are: Your payment should be sent to your account by:

00-20 May 2
21-75 May 9
76-99 May 16

Paper check

If the last two digits of your Social Security number are: Your tax rebate check should be in the mail by:

00-09 May 16

10-18 May 23

19-25 May 30

26-38 June 6

39-51 June 13

52-63 June 20

64-75 June 27

76-87 July 4

88-99 July 11

There may be exceptions, the IRS warned. "A small percentage of tax returns will require additional time to process and to compute a stimulus payment amount. For these returns, stimulus payments may not be issued in accordance with the schedule above, even if the tax return was processed by April 15," the IRS.

[buchanj]

I have taxes in my bk and I got a very small refund this year. I imagine Ill still get the pennies from king george.

[TabulaRasa]

So if I OWE taxes, the refund will offset how much I owe. So either way, the government gets my money, right?

[Cali]

So if I OWE taxes, the refund will offset how much I owe. So either way, the government gets my money, right?

If I owed taxes, I would prefer they take the rebate to pay off those taxes instead of giving it to me.

[wooisme]

This is to stimulate the economy NOT to put it in the pockets of thy creditors. I myself WILL contest it and Fight it with the Bankruptcy Judge IF he takes ours

[eldridgemomma]

This is to stimulate the economy NOT to put it in the pockets of thy creditors. I myself WILL contest it and Fight it with the Bankruptcy Judge IF he takes ours

If the trustee decides to keep your stimulus payment, it will be the trustee's decision and will have nothing to do with the BK judge. I filed almost 5 years ago, and am about to make my final payment.

The IRS sent my very first tax refund to the trustee after I filed, and we had rebate checks that year also, and it was sent to the trustee as well. However, each year after that, I've received my refund. However, this year, I requested that the refund go to the trustee because my refund would end up paying off the bankruptcy. Unbelievably, the IRS refused to send it to the trustee. They stated that if the trustee didn't request it, they could not send it to them. As it turns out, after my first year, the trustee notified the IRS to always send me the refund UNLESS he specifically requested it. Now, my refund is delayed every year because it has to go through the insolvency department, but I normally have it by around the end of March or first of April.

For all of you out there who have recently filed, good luck with your plans.

[PaKettle]

This is to stimulate the economy NOT to put it in the pockets of thy creditors. I myself WILL contest it and Fight it with the Bankruptcy Judge IF he takes ours

I'm with you 100%. I have read some stuff about this here and I agree that the Trustee should NOT be able to take this money. The main point I see is that it is MEANT for stimulating the economy, not paying debts. Having the Trustee take it seems completely contrary to the law, and if they take them, someone should file a class action suit or something.

[wooisme]

If the trustee decides to keep your stimulus payment, it will be the trustee's decision and will have nothing to do with the BK judge.

That's NOT true! You ABSOLUTELY CAN file an objection with the court! You may not be able to stop him from taking it but you can object to it and file a motion of the objection and go before your bankruptcy judge. I WILL Do SO if mine is taken!

[Cali]

If they wanted to stimulate the economy they should have decided on a higher amount to send out. If you live in a expensive area, the 300$ to whatever won't do much.

[sunnysiderays]

So.... Do you think the Trustees will take the stimulus check? Has anyone recieved conformation from their lawyer or Trustee?

[HHM]

So.... Do you think the Trustees will take the stimulus check? Has anyone received conformation from their lawyer or Trustee?

We still don't know. To give you an idea about the lack of info on the subject, when you do a google search for "Stimulus Rebate and Bankruptcy", THIS forum is the top result.

If I had to guess, I suspect that at least one trustee in each BK Circuit will probably try to litigate the issue.