Texas Bankruptcy Blog : Texas Bankruptcy Lawyer & Attorney : Fears Nachawati law Firm : Chapter 7, Chapter 13, Consumer Bankrutpcy : Dallas, Fort Worth, Austin, Houston, San Antonio

Chapter 13 is a repayment bankruptcy. You pay your creditors whatever you can afford over three to five years (three years for lower income earners, five years for higher wage earners). You are required to commit your disposable income to the repayment plan during the repayment period. You are also required to pay as much to unsecured creditors as they would receive in a Chapter 7 liquidation bankruptcy.

An expected income tax refund is property of the bankruptcy estate. Many debtors are able to protect all or a portion of their income tax refunds by applying legal exemptions to the expected refund. After applying all of your available exemptions, the remaining unprotected amount is often little or nothing.

If you cannot protect your tax refund with exemptions, you are required to pay the non-exempt amount in your monthly plan payments. This is because your unsecured creditors would get this money if you filed a Chapter 7 bankruptcy.

Even if you have a non-exempt tax refund, your bankruptcy attorney may be able to save your refund under certain circumstances. One trick to apply the non-exempt portion of your expected income tax refund to next year’s taxes. The IRS will keep your tax overpayment and use it for taxes you may owe 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 your future tax liability is irrevocable under section 6513(d) of the Internal Revenue Code. Consequently, your interest in the refund when you file bankruptcy is limited to what is left after the IRS applies the money to next year’s tax liability.

This trick is common in Chapter 7 cases, but can be used in Chapter 13 cases as well to avoid increasing your monthly plan payment. Working closely with your bankruptcy attorney and a skilled CPA will maximize the amount of money you get to keep. If you are expecting a large income tax refund, but need to file Chapter 13, speak with an experienced bankruptcy attorney and discuss your options. Your attorney can explain how the federal laws can protect your assets and discharge your debts.

The Wall Street Journal reports that 15,000 individuals took advantage of a recent Internal Revenue program offering limited amnesty for taxpayers with undeclared offshore accounts. The deadline for the Offshore Voluntary Disclosure Initiative (OVDI) was September 9, 2011, and far exceeded the anticipated 2,000 applicants. A similar program offered in 2009 collected $2.2 billion in taxes, interest and penalties.

Overseas accounts over $10,000 held by U.S. taxpayers must be reported to the Treasury Department. Significant penalties can be assessed against individuals who fail to report and "hide" their offshore assets. The 2009 and 2011 amnesty programs allowed qualified taxpayers to declare their accounts and escape criminal prosecution. Using figures from IRS Commissioner Doug Shulman, the WSJ article estimates the average revenue per amnesty case at more than $180,000.

Tax debt is not particular to the upper income classes. Small business owners, independent contractors, and employees can also owe the IRS through either mistake or carelessness. Fortunately, there are legal solutions for a tax debt problem. In some cases, dealing with the IRS directly can resolve a tax liability issue. Examples of this are the
an offer in compromise or an installment agreement. In other cases the IRS will simply pursue the tax debtor through garnishment of wages or future tax refunds. A federal tax debt can also result in seizure of personal assets or even jail for tax fraud. The tax man does not have a sense of humor.

Bankruptcy is a powerful shield in resolving a tax debt. The bankruptcy automatic stay will stop the IRS collection processes and allow you time to either propose a repayment plan, or discharge some or all of the tax debt. The rules for discharging personal taxes through bankruptcy are complex and require an experienced attorney's assistance.

If you owe taxes to the IRS that you cannot pay, or need time reorganize your finances and repay your debts, consult with an experienced bankruptcy attorney and learn how the federal bankruptcy laws can shield you from the powerful IRS. The Bankruptcy Code contains several provisions that can provide the honest, but unfortunate taxpayer with needed debt relief.
 

A Chapter 13 bankruptcy case lasts between three to five years. That is three to five New Years, three to five Fourth of July fireworks, and three to five Superbowls. It is also three to five Tax Days (usually April 15). Tax Day is an important concern for anyone in Chapter 13 bankruptcy, and the debtor ignores the importance of this day at his own peril.

During a Chapter 13 bankruptcy the debtor is required to commit all disposable income to repay creditors. Basically, the bankruptcy debtor pays what he or she can afford to pay over the repayment plan period. A debtor who receives a large tax refund is essentially telling the bankruptcy court that this money was not needed, since the debtor elected to allow the U.S. government to hold onto it (interest free!) during the tax year. This income tax refund is disposable income, and the trustee may ask for it!

In theory, avoiding this problem is a simple matter of adjusting your tax withholding. Instead of getting (or losing!) a fat income tax refund in April, you receive a small net increase in income each paycheck.

The difficulty in adjusting your withholding is that the solution could be worse than the problem. If you withhold too little, you could create a tax deficit that you may have trouble paying. Under the current version of the Bankruptcy Code, adding new tax debt could also create a situation where your bankruptcy case may be dismissed. At any rate, a sizeable tax debt you are unable to pay will cause a serious complication for you and your attorney.

If you are contemplating a Chapter 13 bankruptcy filing, discuss your withholding status with your attorney. Your attorney can instruct you whether it is important to adjust your withholding, or to consult with a tax professional to project your tax liability. Ideally, your income tax return will show little or no return, or little or no tax debt.

The traditional wisdom regarding bankruptcy and tax refunds is: get it and get rid of it before filing bankruptcy. The bankruptcy trustee can't take what you don't have, right?

In the law there are rarely absolutes. In some cases the trustee can demand money that you no longer have in your possession. A common example of this is a preference payment to an insider creditor (e.g. repaying a loan to your mother from your tax refund). The trustee can sue you or your creditor for the turnover of the money.

The simplest way to avoid any potential loss of your income tax refund is to discuss the situation with your bankruptcy attorney. In many cases your attorney can exempt all or a portion of your tax refund, so you can keep the cash money after you file bankruptcy. First, you are required to identify the property in your bankruptcy schedules, and then apply the applicable exemption law to protect it. Failure to list or exempt this asset may render the entire amount unprotected and lost to the bankruptcy trustee.

If your exemptions will not protect all of your income tax refund, you should consider spending the difference to benefit your family. The best guidance is to spend the money on goods or services that are reasonable and necessary. While your attorney can help you decide on specific purchases, the following categories are generally safe:

1. Household expenses such as utility bills, mortgage or rent payments, car payment,
auto insurance, and needed auto repairs/tires
2. Personal expenses such as food and clothing, dental work, and medicine
3. Priority debts like child support arrears and tax debts

Luxury good purchases like electronics, vacations, and jewelry should be avoided. Likewise gifts to family members or friends, spending sprees, and gambling should all be avoided. Any payment from your tax refund that you plan to make to a creditor should be discussed with your attorney.

Your income tax refund is your money! You can ensure that this money benefits your family by discussing your situation with your bankruptcy attorney.