Consumer Law Implications of the American Recovery Plan Act

On March 11, 2021, President Biden signed into law the American Rescue Plan Act (ARPA). This legislation has a number of provisions of importance to consumers and consumer attorneys. This article focuses on the Act’s implications for the practice of consumer law.

Creditor Garnishment; Bank Set-Off of Stimulus Payments

The American Rescue Plan Act (ARPA) provides for $1400 per individual in stimulus payments for the majority of Americans. See ARPA § 9601. Unlike the $600 payments provided by the December 27, 2020 stimulus legislation, there is no protection in ARPA, where a bank account contains ARPA stimulus payments, against judgment creditors garnishing the bank account or banks setting off amounts in the bank account to pay for pre-existing debts to the bank.

The December 27 legislation provided that stimulus payments (typically $600 per individual) under that legislation would not be reduced to offset federal debts or to pay state child support enforcement orders and cannot be garnished by judgment creditors. The December 27 payments were coded in a way that banks can recognize them and automatically protect them if they receive a bank account garnishment order. See Public Law No. 116-260, Consolidated Appropriations Act of 2021, div. N § 272.

Because ARPA was passed through budget reconciliation, ARPA does not contain these protections (other than protection against offset for child support), so that ARPA stimulus payments are vulnerable to garnishment in a way quite similar to the vulnerability of the typically $1200 stimulus payments pursuant to the March 27, 2020, CARES Act. As such, reference should be made to an earlier article providing advice on preventing garnishment and set off of CARES Act payments. Nevertheless, many of the emergency state protections listed in that article have now expired.

A bill has been introduced to provide similar protections from garnishment for ARPA payments as the provided for in the December 27, 2020, Public Law No. 116-260. Be alert to new legislation that might offer these protections for ARPA payments.

Ways to Protect ARPA Stimulus Payments from Garnishment

Delaware limits bank account garnishments, and California, Massachusetts, and New York protect a certain dollar amount in a bank account as automatically exempt from garnishment. In other states, after a bank account is frozen pursuant to a garnishment order, the consumer will have to raise applicable exemptions, either for funds in a bank account or a more general “wild card” exemption. For more details, see:

• • NCLC’s Collection Actions Appendix H (state-by-state listing of exemptions) (currently free to the public).
• • NCLC’s No Fresh Start 2020: Will States Let Debt Collectors Push Families into Poverty in the Wake of a Pandemic? Appx. D (Oct. 29, 2020) (state-by-state listing of exemptions) (free to the public).
• • NCLC's Collection Actions § 14.5 (bank account seizures) (open to subscribers). 

Exemptions applicable to “public benefit payments” in at least some states have been treated as applicable to federal stimulus payments. In addition, some state emergency COVID-19 orders issued in the spring or summer of 2020 may still be in place, preventing bank account garnishment. A current tracker of these state actions is found here.

If a consumer believes that the consumer’s bank account will probably be subject to a garnishment order to repay a court judgment, watch for when the stimulus payment is directly deposited to the bank account, and move the funds out of the account as soon as possible, such as by paying off delinquent high priority debts (e.g., rent, mortgages, or car payments), purchasing necessary items (e.g., food), or withdrawing the payment in cash. Another option that reduces but does not eliminate the risk of garnishment is to move funds from a bank account onto a prepaid card or a new bank account at a smaller bank or credit union. Prepaid cards or the new account are subject to garnishment, but they are less likely to be on creditors’ radar screens.

When a consumer’s Social Security, SSI, or VA benefits are direct deposited into a bank account or a Direct Express card, a dollar value equal to two months’ worth of those deposits is protected from garnishment, even if the amount in the account is traceable to the stimulus payment instead of to those federal benefits. See 31 C.F.R. § 212; NCLC’s Collection Actions § 14.5.4. Such an account is thus fully protected from garnishment if the account balance is kept below an amount where deposit of the stimulus payment will still keep the balance under two months’ worth of the federal benefits.

If a stimulus payment is made via a paper check, and there is a risk of garnishment, recipients can cash the check instead of depositing it into their bank accounts. The consumer’s bank may be willing to confirm that there is no garnishment order and to cash the check immediately.

Walmart, grocery stores, or other merchants in the past have accepted federal checks and provided cash back that can be saved or loaded onto a prepaid card. During COVID, banks may waive check cashing fees for non-customers cashing stimulus checks. Friends or relatives may be willing to provide cash in return for endorsement of the check to them, but they may face significant problems depositing an endorsed check into their account. A bank may either refuse or request a hold on the funds in a friend’s account. If other means of cashing the check are unavailable, the risk of bank account garnishment must be weighed against the high cost of using check cashing companies.

Separate rules apply where a bank, to repay an amount due to the bank, sets off amounts deposited in an account to repay that debt. In the past, many major banks voluntarily waived this right for stimulus payments. For a discussion of bank seizure of stimulus payments pursuant to the banker’s right of setoff, see the relevant section of “Protecting Against Creditor Seizure of Stimulus Checks.” See also NCLC’s Consumer Banking and Payments Law Chapter 10.

Protection of Stimulus Payments from a Bankruptcy Trustee

Public Law No. 116-260, Consolidated Appropriations Act of 2021, div. FF, tit. 10, § 1001(a) adds a new Bankruptcy Code § 541(b)(11) to the list of exclusions from property of the bankruptcy estate. It provides that “recovery rebates made under section 6428 of the Internal Revenue Code of 1986” are not property of the estate. The stimulus payments under the Consolidated Appropriations Act were authorized under new section 6428A of the Internal Revenue Code.

The ARPA stimulus payments are provided using this language: “Subchapter B of chapter 65 of the Internal Revenue Code of 1986 is amended by inserting after section 6428A the following new section ... In the case of an eligible individual, there shall be allowed as a credit against the tax imposed by subtitle A for the first taxable year beginning in 2021 an amount equal to the 2021 rebate amount determined for such taxable year.” See ARPA § 9601(a). The ARPA stimulus payments are therefore authorized under IRC § 6428B. This means that consumers who receive an ARPA stimulus payment may file bankruptcy without having to use a wildcard or other exemption to protect the funds from possible recovery by the bankruptcy trustee.

It is possible that a court may construe section 6428B as a separate statute and therefore not a recovery rebate “under section 6428.” However, this interpretation would render meaningless the enactment of Code § 541(b)(11) because even the stimulus payments under the December 27, 2020 Consolidated Appropriations Act would not be protected—they were authorized under section 6428A, and the earlier stimulus payments under the CARES Act would have already been spent by debtors at the time Code § 541(b)(11) became effective. Such a reading of the statutory provisions would be contrary to Congress’s intent to protect stimulus payments.

Cancelled Student Loans Are Not Taxable Income

The ARPA temporarily removes federal income tax consequences for all federal and private student loan discharges and cancellations. See ARPA § 9675. Ordinarily, the forgiveness of debt is taxable income to the individual whose debt is forgiven.

Under the new provision, federal student loans that are discharged for any reason after December 31, 2020 and before January 1, 2026 are not included as income subject to federal taxation. Although many specific types of federal student loan discharges were already excepted from income tax consequences, as discussed in NCLC’s Student Loan Law § 10.15, this change extends the protection from taxation so that it applies to any discharge, regardless of the reason for the discharge. The new provision also generally applies to protect most private student loan forgiveness from income tax consequences.

Perhaps most significantly, this new change protects from tax consequences, during the covered time period, borrowers who receive forgiveness under an income-driven repayment plan. The change also means that if any widespread cancellation or reduction of federal student loans by Congressional or administrative action occurs during the covered time period, there will be no income tax consequences for that cancellation as well. Further, the universal nature of this exclusion from taxation may mean that the Department of Education and its servicers are less likely to send borrowers who receive a discharge an IRS Form 1099-C, reporting the amount of discharged federal student loan debt. Sending consumers IRS Form 1099-C has caused borrowers confusion as to whether the discharge is taxable income.

For more on grounds to cancel or discharge a federal student loan debt, see NCLC’s Student Loan Law Chapter 10. That chapter examines the closed school, false certification, unpaid refund borrower defense, disability, and death discharges, and also forgiveness for public service, teachers, other professions, and for other categories of student loan borrowers. Forgiveness based on income-driven repayment plans is examined at NCLC’s Student Loan Law Chapter 3.

Recent Legislation Also Excludes Mortgage Debt Forgiveness from Taxable Income

When the principal amount of a homeowner’s mortgage debt is partially or fully forgiven through a short sale, loan modification or otherwise, the amount forgiven is included in a taxpayer’s gross income, triggering a potential hefty tax liability. The Qualified Principal Residence Indebtedness (QPRI) Exclusion allows a taxpayer to exclude up to $2 million of the forgiven debt related to a decline in the value of the residence or to the financial condition of the taxpayer. See 26 U.S.C. § 108(a)(1)(E). The QPRI exclusion was to expire on January 1, 2021. It is now extended to January 1, 2026. See Public Law No. 116-260, Consolidated Appropriations Act, 2021, Taxpayer Certainty and Disaster Tax Relief Act of 2020, div. EE, § 114.

New Consumer Relief Concerning Energy and Utility Bills

The ARPA provides an additional $4.5 billion for energy bills through the existing Low Income Home Energy Assistance Program (LIHEAP). See ARPA § 2911. For a discussion of the LIHEAP program, see NCLC’s Access to Utility Law Chapter 8. State LIHEAP programs have already received their regular appropriations for this year, and will receive their allocation from the additional $4.5 billion shortly. Low-income consumers should apply immediately for LIHEAP assistance if they have not done so already.

The ARPA may provide other assistance for tenants with utility arrears, depending on the state and local government. Utilities have been defined to include electricity, gas, water and sewer, trash removal, and energy costs, such as fuel oil. In addition broadband can be covered an “other expense” under this program, depending on the state or locality. The Treasury has already sent to the states and local governments Emergency Rental Assistance (ERA) funds pursuant to the December 27, 2020, COVID relief package. The ARPA provides an additional $20 billion, which will likely be distributed in a similar manner. See ARPA § 3201. Check to see if the state or local agencies administering ERA assistance are allowing existing ERA assistance (and presumably the new funds) to be used not only for rent payments, but for utility arrearages or payments on current utility bills.

Help for Homeowners, Renters

The ARPA includes $10 billion to help prevent foreclosures through the Homeowner’s Assistance Fund that will be distributed to the states and then to homeowners through state housing finance agencies. ARPA § 3206. States have 45 days to apply for the funds. Homeowners cannot seek assistance until the states determine the criteria for this assistance and the appropriate application procedures. NCLC will provide further guidance when available.

The Treasury has already sent to state and local governments Emergency Rental Assistance (ERA) funds from the December 2020 COVID relief package. The ARPA provides an additional $20 billion, which will likely be distributed in a similar manner. ARPA § 3201. Check to see if the state or local agencies administering ERA assistance have established application procedures and criteria for distribution of the ERA funds appropriated by the December 27, 2020 legislation.

Broadband Assistance

The ARPA provides $7.2 billion for broadband for schools and libraries to help close the homework gap for students (called the “Emergency Connectivity Fund” program). ARPA § 7402. The Federal Communication Commission has 60 days from enactment to develop the rules for this program, but it is expected to cover things like hot spots and internet service costs for those hot spots for students and library patrons. This funding is different than the Emergency Broadband Benefit program authorized by the December 27, 2021 legislation. Consumers should be able to enroll at the end of April or early May. Payments of up to fifty dollars a month are expected to be sent to eligible individuals by the end of April or early May (up to $75 on tribal lands) for broadband service. These payments will help connect low-income students, families, and unemployed workers. There will also be payments up to $100 for a laptop, tablet or desktop (with a $10–$50 co-pay).

The funding will be available to Lifeline recipients (in addition to Lifeline benefits), Pell grant recipients, households with students in the free and reduced school lunch program, and households experiencing a severe drop in income. See Public Law No. 116-260, Consolidated Appropriations Act of 2021, div. N § 904. Consumers should be prepared to apply for the Emergency Broadband Benefit by the end of April or early May. Consumers may have a Lifeline benefit at the same time with the same or different provider. Since Lifeline participation provides automatic eligibility for the Emergency Broadband Benefit, it is worth considering applying for Lifeline right now if the low-income consumer hasn’t already.

Water and Sewer Bill Assistance

The December 27, 2020, COVID relief package includes $638 million low-income water and sewer bill assistance program that can be used to cover arrearages as well as current bills. The ARPA provides for an additional $500 million. See ARPA § 2912. The program will be run through the Department of Health and Human Services, but the program, even using the December 27, 2020 funds, has yet to be implemented. This is another area where potential recipients need to be alert for future developments.