Means Test Extension beyond the CARES Act

 Posted on May 25, 2021 in Chapter 7

The CARES Act’s March 27, 2021 deadline for excluding pandemic relief payments from the means test was extended by one year to March 27, 2022.

At the beginning of the pandemic, the CARES Act made some helpful temporary changes to consumer bankruptcy law. (See our blog post in March 2020 about this.) Those changes had expiration dates which have now passed. However, in the meantime, Congress passed two other laws which extended the changes. They are still temporary changes. As time passes, these consumer bankruptcy law changes and their new expiration dates continue to be important. Today we focus on one of these changes pertaining to the Chapter 7 means test. 

All Pandemic Relief Payments Excluded as Income for the Means Test

The point of this first change is to prevent the pandemic relief payments from disqualifying people from Chapter 7, “straight bankruptcy.” People could receive and spend their payments without jeopardizing their bankruptcy options. Here’s how it works. 

To qualify for a consumer Chapter 7 case, you have to pass the “means test.” Part of this test is a rather complicated calculation of what’s called your “current monthly income.” This is essentially the average of the last six previous full calendar months of income from virtually all sources. A single large payment—such as a $1,400 or $2,800 pandemic relief payment—could artificially increase your “current monthly income.” In many situations, that would make you fail the “means test.” That would likely disqualify you from filing a Chapter 7 case. Then you’d not be able to legally write off (“discharge”) your debts in that 3-4 month process. Instead, you’d have to resort to filing a Chapter 13 case with a 3-to-5-year payment plan. 

The 2020 CARES Act solved that problem by excluding any pandemic relief money from the definition of “current monthly income.” Section 1113(b)(1)(A) of the CARES Act. To be precise, the following was excluded from income: 

Payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19)

Coronavirus Aid, Relief, and Economic Security Act (“CARES”), Section 1113(b)(1)(A). Also found in the U.S. Bankruptcy Code Section 101(10A)(B)(ii)(V).

Since all 3 rounds of relief payments were made under this “national emergency,” none count towards your “current monthly income.” At least they don’t for a certain length of time.

Pandemic Relief Payments Received in the Last 6 Months

This exclusion from “current monthly income” is currently most relevant regarding the last two rounds of relief payments. $600 per person/$1,200 per couple/$600 per child payments started going out in early January 2021. IRS News Release, Dec. 29, 2020. $1,400 per person/$2,400 per couple/$1,400 per child payments started going out in mid-March 2021. Third Economic Impact Payments, IRS. As of the writing of this blog post (May 23, 2021), all payments received under these two rounds would fall within the 6-month look-back period of the means test. Excluding these payments would thus be necessary for many people to avoid failing the means test. 

The CARES Act Change Expired, But Has Been Extended

Under the CARES Act, the provision excluding pandemic relief payments from the means test expired after March 27, 2021. However, just hours before this expiration, Congress passed the COVID-19 Bankruptcy Relief Extension Act of 2021. Among other things, this brief Act extended this March 27, 2021 by one year. 

The New Deadline

So with the Extension Act’s additional year, now this income exclusion of pandemic relief payments applies to Chapter 7 cases filed through March 27, 2022.

Most people will have received all their pandemic relief payments well before 6 months before that date. The initial $1,200 CARES Act relief payments started being delivered nearly two years earlier (mid-April 2020). Plus, most people have received the other two rounds of payments by now. So this extension will be affecting fewer Chapter 7 filers over time as we approach the new March 27, 2022 deadline. 

However, payments get delayed, sometimes for months, for often seemingly minor reasons. Where’s My Third Stimulus Check? 6 Reasons It Hasn’t Arrived Yet, Forbes Advisor. 

Furthermore, even more significant delays can happen for one distinct reason. All three rounds of these relief payments are actually advances on tax credits. (“Recovery Rebate Credit.”) Some people fall between the cracks and simply don’t receive relief payments for which they are eligible. They can eventually get them as federal tax credits when they file their tax returns. The credit will be part of their tax refunds. (Or the credits will reduce their tax liability.) 

The first two rounds were advance payments of the Recovery Rebate Credit for the 2020 tax year. 2020 Recovery Rebate Credit, IRS. The third round was an advance payment of the Credit for the 2021 tax year. So if you are receiving all or part of the pandemic relief payments in the form of tax credits, it may be a while before you receive them. Then if you file bankruptcy within six months of that, having that tax credit not count towards your means test could enable you to pass that test.

For Example

First, let’s say you just receive your $1,400 relief payment today because of one of the many ordinary delays. Assume this is happening in late May 2021. If you file bankruptcy between now and late November 2021, the 6-full-month look-back period would include this $1,400 payment. Because the COVID-19 Bankruptcy Relief Extension Act extended the deadline well beyond that, this $1,400 payment would not count towards the means test calculation. 

Second, let’s say you didn’t receive the third, $1,400, relief payment. So you file your 2021 IRS tax return to get it as a tax credit. So you’d submit your tax return in late January 2022. Then say you’re lucky enough to receive a refund with the tax credit in late February. Then if you file your Chapter 7 case by March 27, 2022, you can exclude that tax credit from your means test calculation. That $1,400 tax credit would not be part of your “current monthly income,” making passing the means test much more likely.

However, now let’s say in a similar scenario you weren’t so fortunate. Say you didn’t receive your tax credit as fast and did not file your Chapter 7 case until after March 27, 2022.  Receiving that tax credit of $1,400, or $2,800 for a couple, or $5,600 for a family of four, would greatly increase your “current monthly income” amount. The higher amount could quite likely disqualify you from filing a Chapter 7 case. 

The Bottom Line

Keep this March 27, 2022 deadline in mind. Not doing so could significantly reduce your options. See your local bankruptcy lawyer to apply all this to your own unique circumstances.