Can I Keep My Future Tax Refunds After I File Chapter 13?

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 re-emphasized the need for a Chapter 13 debtor to commit all of his or her disposable income to repaying creditors during bankruptcy.  Since that time, Chapter 13 bankruptcy trustees across the country have argued that tax refunds constitute disposable income – income not needed by the debtor to pay reasonable and necessary expenses, such as food, transportation and shelter. Courts have unanimously agreed with the trustees: tax refund money is surplus, and the Chapter 13 debtor must turn over these refunds to the bankruptcy estate.

There are a few ways to combat this loss during a Chapter 13 bankruptcy.  The most obvious way is to not create a tax refund in the first place. This means careful vigilance of your tax situation. Instead of Uncle Sam holding onto your money throughout the year, make sure that you only give the tax man what is owed – and no more.

Another way to avoid an income tax loss is to include language in the bankruptcy plan that excludes income tax refunds. This exclusion must be supported by evidence of the need to pay a reasonable and necessary expense. For instance, you may propose to pay annual property taxes with income tax refunds. These types of proposals have a low success rate and will almost always draw an objection from the trustee or a creditor.  Furthermore, the bankruptcy court may be reluctant to allow this proposal due to the unpredictable nature of using a tax refund as income (the refund may be what you expect, it may be more, it may be less, or it may not come at all).

Finally, many Chapter 13 debtors attempt to modify their plans to excuse a particular refund, or part of a refund. Some courts and trustees will allow a debtor to keep money from an income tax refund when the debtor shows that the money is needed to pay reasonable and necessary expenses.  For instance, if the debtor suffers an unexpected expense, such as an unexpected medical bill, funeral expenses, or a car repair, the debtor may be able to keep tax money to cover the expense.  The bankruptcy court will not allow the debtor to keep tax money to pay for food, utilities, a car payment, or other expenses that should be paid by the debtor’s regular income.

Income tax refunds (and underpayment of taxes) during Chapter 13 bankruptcy always cause headaches, so the best advice is to pay attention to your income. A regular visit to a seasoned CPA will avoid tax issues and keep more money in your pocket. 

Can I Keep My Anticipated Tax Refund if I File Chapter 7?

A Chapter 7 bankruptcy is an erase-your debts-start-fresh bankruptcy. It is meant to give an individual a chance to begin anew on a financial path without the burden of overwhelming debts dragging him or her down. On the other hand, Chapter 7 bankruptcy is not intended as a way to legally hide from debts the person can afford to pay.

That tension that felt most keenly when dealing with an individual’s income tax refund during Chapter 7 bankruptcy. On the one hand, the debtor is excited about his Chapter 7 “fresh start” and is eager to use his after-bankruptcy tax refund to help him along with his new financial future. On the other hand, his creditors are eyeing his income tax refund as a pre-bankruptcy asset that should be used to repay his debts.

Both creditors and debtors have a claim on the debtor’s anticipated income tax refund. The debtor is entitled to the refund, even though it is not yet received. Consequently, the debtor’s interest in receiving this refund must be included in the debtor’s bankruptcy estate. Because it is property of the estate, the debtor is able to use legal exemptions to protect all or a part of the tax refund.  The remaining non-exempt portion must be paid over to the bankruptcy trustee for distribution to creditors.  Often debtors are able to exempt enough of an expected income tax refund that it will make the remaining sum de minimis, or so little that it is not worth the trustee’s time or effort to take and distribute the funds.

The debtor must turn over non-exempt tax money even if the refund is not received until after the debtor receives a discharge. The only timing that matters is whether the debtor had a legal interest in the income tax refund at the time he filed the case. When the refund is actually received by the debtor is of no consequence. In many cases a trustee will leave a debtor’s case open until the debtor has both filed and received his income tax refund. This may mean remaining in bankruptcy for many months longer than expected.

The best way to avoid income tax refund problems during bankruptcy is to file the case after the tax refund is both received and spent. Your attorney can direct you on how to spend your tax money and avoid further bankruptcy complications.

Another way to protect non-exempt money from an income tax refund is to apply the non-exempt portion of the expected income tax refund to next year's taxes. The IRS will keep the tax overpayment and use it for taxes owed in the future. The Tenth Circuit case of Weinman v. Graves, 609 F.3d 1153 (10th Cir. 2010) holds that the bankruptcy trustee cannot force the IRS to turnover a tax refund that is held to pay future taxes. The election to apply the refund to a future tax liability is irrevocable under section 6513(d) of the Internal Revenue Code. Consequently, the debtor’s interest in the refund when he files bankruptcy is limited to what is left after the IRS applies the money to next year's tax liability.

If you are considering filing bankruptcy and expect a large income tax refund, speak with an experienced bankruptcy attorney. Your attorney can discuss your options and help you choose the right course of action for the maximum financial benefit using the federal bankruptcy laws.

How Long After Christmas Should You Wait to File Bankruptcy?

Bankruptcy after the holiday season is very attractive for many debtors, and for good reasons. Bankruptcy is a good time to purge debt, especially from credit cards, and get personal finances under control. However, timing your bankruptcy after Christmas can mean the difference between a fresh start and a false start.

The Bankruptcy Code provides that credit card purchases for “luxury goods or services” totaling more than $650.00 (“in the aggregate”) within 90 days prior to filing a bankruptcy case are presumed nondischargeable debts and will survive the bankruptcy discharge. See 11 U.S.C. § 523(a)(2)(C)(i)(I). However, the Bankruptcy Code goes on to state that “luxury goods or services do not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.” See Section 523(a)(2)(C)(ii)(II). That means if a debtor purchases twenty dollars in food from the grocery store, that charge is not be counted toward the aggregate of “luxury goods or services.” By the plain language of the Bankruptcy Code, if a debtor charges over $650 on one credit card for food, gas, and other necessary items, there is no presumption of nondischargeability.

A presumption is just that, the creditor must first file a complaint against the debtor. To get the presumption, all the creditor must show is evidence of credit card charges totaling over $650 in the 90 days before the bankruptcy filing. That said, for many creditors the costs involved in contesting the debtor's discharge may exceed the benefits from having the debt excepted from discharge.

While there are many good defenses to a creditor’s presumption against discharge, the best advice is generally to wait to file bankruptcy until a full ninety days after your last charge. Additionally, pay at least the minimum monthly on your credit card, if you are able. The best time to prepare to file bankruptcy is now, but the best time to file after Christmas may be the last part of March. As always, speak with your bankruptcy attorney about the specifics of your case.

The Language of Bankruptcy

Every profession has its own special language. The use of highly technical terms is a shorthand way to efficiently communicate highly complex ideas between professionals. Unfortunately, bankruptcy language often excludes non-lawyers from the conversation. Many bankruptcy debtors become confused or overwhelmed by the technical bankruptcy terms used by attorneys, the trustee, and the bankruptcy court. Learning a few simple bankruptcy terms can make the process more understandable.

Automatic stay – an injunction issued by the bankruptcy court that stops all collection action against the debtor and is effective immediately and automatically when the bankruptcy case is filed

Bankruptcy estate – the debtor’s legal and equitable interest in property at the time the bankruptcy case is filed. Control over the bankruptcy estate can be vested in the debtor or the bankruptcy trustee

Chapter – chapters of the Bankruptcy Code. Some chapters are general and apply to all cases; other chapters apply only to specific bankruptcy cases

Debtor – the individual or company filing bankruptcy

Discharge – a court permanent injunction prohibiting future collection action of certain debts against the debtor personally

Equity – the value of a debtor's interest in property after subtracting liens

Exemptions – legal protections that shield property from creditor collection. Exemptions are found in state and/or federal laws

Means test – a calculation of the debtor’s income and expenses meant to determine the debtor’s ability to repay unsecured debts. “Failing” the means test means that there is a presumption that the debtor is able to pay unsecured creditors in a Chapter 13 case

No-asset case – a Chapter 7 case without available assets to pay unsecured creditors

Nondischarged debt – a debt that is not absolved during bankruptcy

Petition – papers filed by the debtor that commences the bankruptcy

Plan – the debtor’s proposed plan to repay creditors during a bankruptcy case (does not apply to Chapter 7 cases)

Preference – a debt that was paid prior to the bankruptcy while the debtor was insolvent

Priority debt - the order in which unsecured claims are paid according to the Bankruptcy Code

Proof of claim – a creditor’s claim and verification of a debt

Reaffirmation agreement – an agreement between the debtor and creditor that entitles the debtor to retain property in exchange for continued personal liability to pay a debt (common examples are a car or house loan)

Schedules – the debtor’s detailed description of the property, debts, income and expenses filed with the bankruptcy court

Secured creditor – a creditor holding a lien against property of the debtor’s as security for payment of a debt

341 meeting – a meeting that the debtor must attend with the trustee.  The debtor’s creditors are invited to the 341 meeting and are allowed to ask questions.

Trustee – an individual appointed to oversee the debtor’s bankruptcy case. This is not the bankruptcy judge.

Mastering a few simple terms will aid your understanding during your bankruptcy case. 

Stop Automatic Payments during Bankruptcy

Automatic payments are a convenient way to pay bills. An automatic payment is an automated process that pays bills directly from a banking or brokerage account through an electronic payment system. Typically, an individual will authorize a regular payment that doesn't change from month to month, such as a mortgage or car payment. An individual may stop or delay automated payments at any time.

A direct debit is an agreement that the recipient can take money out of your account to pay your bill. You might authorize a direct debit for an electricity, phone, or credit card bill. Of course, a direct debit could be authorized for most any bill.

When you file for federal bankruptcy protection, the bankruptcy court automatically issues a temporary injunction called the automatic stay. This court order prohibits all of your creditors from taking any action to collect a debt from you. The automatic stay is very broad and applies to most creditors; even the ones that you want to continue paying.

Because of the automatic stay, creditors will routinely stop any direct debit of your bank account and refuse automatic payments. The purpose of this refusal is to remain in compliance with the court order and avoid further entanglement with the debtor’s bankruptcy case. This can be frustrating to the debtor who wants to pay a monthly mortgage payment or car loan bill.

The answer to this problem is simple: mail your payment to the creditor! Remember, the automatic stay prohibits a creditor from collecting on a debt, not accepting a voluntary payment. It is good practice to maintain good records of all payments made to secured creditors during your bankruptcy. Your check may not be cashed for weeks while your lender forwards the payment to another department now handling your loan (e.g. bankruptcy department). By sending your payment via registered mail, you will have a receipt of timely payment, regardless when the check is cashed.

The bankruptcy process provides quick and powerful relief when you have the help of an experienced guide. An experienced bankruptcy attorney knows how the laws and common practices will affect your case, and can lead you to a fresh start without complications.

When a Prosecutor Acts as a Private Debt Collector

In every jurisdiction it is a crime to write a bad check with knowledge of insufficient funds. In other words, if you write a check at Wal-Mart, knowing that there is not enough money in your bank account to cover the check, and Wal-Mart believes that your check is a present payment, then you may have committed a crime. Some prosecutors will give individuals the chance to pay these check, plus fees, and no criminal charges will be filed. After all, most merchants don’t want their customers thrown in jail – they just want the money.

Commonly known as a check diversion program, a letter threatening criminal prosecution is a powerful collection tool. However, this practice is routinely abused. Now, the American Bar Association's Standing Committee on Ethics and Professional Responsibility has issued an opinion on the matter. ABA Formal Ethics Opinion 469 advises criminal prosecutors that it may be unethical to use the prosecutor’s office to scare consumers into paying bounced checks.

The ABA opinion states, “Typically, no lawyer in the prosecutor's office reviews the case file to determine whether a crime has been committed and prosecution is warranted or reviews the letter to ensure it complies with the Rules of Professional Conduct prior to the mailing.” The prosecutor-debt collector arrangements is also “abusive” because it conveys “the impression that the machinery of the criminal justice system has been mobilized” against the consumer, who is led to believe that he or she may face jail time unless the collector gets paid.

In many jurisdictions check diversion letters are routinely sent out by prosecutors without review and, in some cases, without even a reasonable basis that a crime was committed. Hopefully, this ABA opinion will deter this practice and limit the number of these improper and unethical letters.

Best Credit Card to Get After Bankruptcy

Credit cards after bankruptcy are scary. A new credit card may mean playing with the same fire that just burned you. However, credit cards are a great way to build a credit profile and recover quickly after bankruptcy. But which one? And when should you apply? 

Credit Card Basics

Comparing credit cards essentially comes down to the terms of the cardholder agreement (the contract between you and the bank): 

·         The credit line or credit limit is the total amount you may charge on the credit card account.

·         A secured credit card will grant the cardholder a credit line equal to an amount placed on deposit with the bank.  In other words, you deposit $500 into an interest bearing account and the bank gives you a credit card with a $500 limit that is secured by the deposit. Naturally, unsecured credit cards are not secured by anything.

·         The annual percentage rate (APR) is the interest charged on balances. Sometimes the APR changes to a higher rate if you pay late, charge beyond your limit, or take a cash advance. The APR may be fixed or variable. Fixed rate APRs have consistent interest rates. Variable APRs are tied to an index, like the prime lending rate, which changes over time.

·         The interest calculation method should be examined. Interest is usually calculated by averaging the daily account balance and multiplying that figure by the “periodic rate” (APR divided by the number of days in a year).

·         Some credit cards grant the customer a grace period which omits an interest charge if the balance is paid before the grace period expires.

·         Some banks have creative fees to charge cardholders, such as fees for cash advances, balance transfers, paying late, exceeding your credit limit, and annual fees. Other bank have very creative fees, such as application fees, set up charges, dormant card fees, online account management, and even terminating the account.

The Best Post-Bankruptcy Credit Card

In a perfect world this article would point the reader to a credit card with 0 percent APR, gives cash back for purchases, airline points for travel, and has no fees. Since we all live in the real world, here is some practical advice:

1.      There is no perfect time to apply for a credit card after bankruptcy. Many bankruptcy debtors report receiving credit card offers, some even before the case is closed.

2.      Most credit experts recommend charging a small amount on your cards each month, paying regularly, and keeping the card at zero or less than a five dollar balance. Used this way, the effect of a high APR is negated.

3.      Examine the terms of a cardholder agreement closely for fees. If you have questions, or want to compare agreements, the Consumer Financial Protection Bureau maintains a credit card agreement database with agreements from more than 300 card issuers.

When Can I Avoid Pre-Bankruptcy Credit Counseling?

The bankruptcy general rule is that individuals must receive credit counseling from an approved agency within 180 days prior to filing bankruptcy. However, there are exceptions to this general rule. In a few limited circumstances credit counseling is not required. These circumstances are identified by the federal Bankruptcy Code as:

(1)        incapacity where the person is so impaired by reason of mental illness or deficiency that the individual is incapable of making rational decisions;

           (2)      disability where the person is so physically impaired that the individual is unable, after reasonable effort, to participate in an in person, telephone, or Internet briefing session; or

               (3)        active military duty in a military combat.

The Bankruptcy Code also allows individuals to receive credit counseling after a bankruptcy case is filed under the following conditions:

(1)        exigent circumstances exist that merit a waiver;

(2)        the individual requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services during the 5-day period before filing bankruptcy; and

(3)        the request and explanation is satisfactory to the court.

Be advised that a pending foreclosure or lawsuit, procrastination, inability to pay for the counseling, incarceration, oversight, and “I don’t wanna do it” do not excuse the debtor’s failure to complete the pre-bankruptcy credit counseling. Bankruptcy courts are very unforgiving when credit counseling is not completed pre-bankruptcy and reluctant to approve waivers except in the most extreme circumstances.

Only agencies approved by the Department of Justice’s U.S. Trustee Program can issue pre-bankruptcy credit counseling certificates that are accepted by the bankruptcy court.  Each agency is required to provide the service free of charge if you cannot afford to pay the credit counseling fee. Otherwise, the agency will charge a fee of around $50.  The session will last approximately 60 to 90 minutes and includes an evaluation of your personal financial situation, a discussion of alternatives to bankruptcy, and may include a personal budget plan. This counseling session may take place in person, on the phone, or online.

Once your credit counseling session is completed, a certificate is issued which must be filed with your bankruptcy case. Failure to complete the credit counseling or file the certificate will result in the dismissal of your bankruptcy case. Your bankruptcy attorney will recommend trusted credit counseling agencies. Discuss the credit counseling process with your attorney if you have questions. Do not overlook this mandatory credit counseling!

VA Benefits and Bankruptcy

With malice toward none, with charity for all, with firmness in the right as

God gives us to see the right, let us strive on to finish the work we are in,

to bind up the nation’s wounds, to care for him who shall have borne the

battle and for his widow, and his orphan, to do all which may achieve and

cherish a just and lasting peace among ourselves and with all nations.

- Abraham Lincoln, Second Inaugural Address, March 4, 1865

 

Abraham Lincoln is considered the father of the Veteran’s Administration, which arose out of the national desire to care for civil war veterans. From 2000 to 2013, the number of veterans who were receiving disability payments rose by almost 55 percent, from 2.3 million to 3.5 million. Some of these veterans are permanently and totally disabled, and unable to work. Some struggle with debts that they cannot pay with their monthly VA check.

It is important to have an experienced attorney working on your side if you file bankruptcy when in receipt of VA disability compensation benefits. Many debtors (and some attorneys!) believe that VA disability benefits are entirely excluded from the bankruptcy process. This is not true. Whether VA disability benefits are protected during bankruptcy can depend on the circumstances of the case.

Means Testing

VA disability compensation is included in the debtor’s Chapter 7 Means Test calculation. However, many veterans in receipt of VA disability can avoid the Means Test altogether if the individual is (1) a veteran who is entitled to compensation under laws administered by the Secretary for a disability rated at 30 percent or more, or (2) a veteran whose discharge or release from active duty was for a disability incurred or aggravated in line of duty. Additionally, the debts in the veteran’s bankruptcy case must have been “primarily” incurred while on active duty, or while performing a homeland defense activity. “Primarily” is generally interpreted by the bankruptcy courts as greater than 50%.

The Bankruptcy Estate

Even though VA disability compensation is used to determine the veteran’s eligibility to file Chapter 7 bankruptcy, these benefits are not part of the debtor’s bankruptcy estate. In other words, the VA disability compensation is protected from creditor garnishment and is also protected from the trustee during bankruptcy (although there are exceptions including federal offsets and child support debts). Generally, the debtor cannot be forced to use this money to pay creditors during bankruptcy. 

If you are receiving VA benefits and need bankruptcy relief, consult with an experienced attorney who can protect your money and discharge your debts. Your attorney can review your situation and advise you on the right way to avoid trouble during your bankruptcy case.

Supreme Court to Decide Bankruptcy Issue

Imagine that you propose a Chapter 13 repayment plan to repay your creditors, but the bankruptcy court refuses to confirm it.  What can you do?

If you live in the Third, Fourth or Fifth circuits, you may immediately appeal the bankruptcy court’s decision. However, if you live in the First, Second, Sixth, Eighth, Ninth or Tenth circuits, you are stuck with either proposing another plan or having the case dismissed. In these circuits, only after the case is dismissed is the issue a final, appealable order.

Partly as a result of this split of opinion between the circuit appellate courts, the U.S. Supreme Court recently agreed to hear the issue as part of the case of Louis B. Bullard v. Hyde Park Savings Bank et al, a case on appeal from the First Circuit. In that case the debtor proposed a plan to split a home mortgage debt into secured and unsecured portions. Pursuant to the plan he would then pay the secured portion at one rate and the unsecured portion at the same rate as all other unsecured debts in the case. The bankruptcy court rejected the plan. When the debtor appealed, the appellate court found that the bankruptcy court’s rejection of the repayment plan was not a final order because the debtor could simply propose another plan.

This issue has potential far-reaching consequences in Chapter 13 and Chapter 11 business bankruptcy cases. The Supreme Court will likely hear oral arguments in the spring.