Archive for the ‘Tax in Bankruptcy’ Category

Anticipating Bankruptcy: Plan Now To Avoid Forfeiting A Tax Refund To Your Bankruptcy Trustee

Tuesday, July 13th, 2010

There are usually several things you can do to prepare for filing bankruptcy if you can anticipate the need to file months in advance. I consulted with a client living in Ft. Myers who he will need to file Chapter 7 bankruptcy by the end of this year.  He needs to wait until year end so that his repayment of family loans in 2009 will not be reversed as preferential payments chosen creditors. The told me he usually gets a significant tax refund and asked me if there is anything he can do to avoid losing the refund over to the bankruptcy trustee after his creditor meeting anticipated early in 2011.

I suggested that this client change his income tax withholding to zero for the balance of the year. My CPA tells me that taxpayers have the right to set their withholding amounts. If the client does not withhold taxes for the second half of the year he will probably wipe out any tax refund accrued during the first part of the year and end up owing taxes when he files in April, 2011. There will be no tax refund receivable if he files bankruptcy later in 2010. The client can spend the extra money not withheld by the IRS on necessary house or medical expenses, bankruptcy attorney fees, or on a dream vacation. This person is not obligated to give the IRS money now to  hold for the benefit of his creditors and a bankruptcy trustee after filing. Better that the client use the money for himself than forfeit a 2011 refund in his bankruptcy case.

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Income Tax Season For Chapter 7 Bankruptcy Trustees

Monday, February 1st, 2010

Its tax season once again. In bankruptcy, tax season means hunting season for Chapter 7 trustees. During the first four months of year the Chapter 7 trustees are especially diligent about going after IRS tax refunds owed to debtors. The general rule is that any money, including income tax refunds,  owed to you at the time you file bankruptcy is part of the bankruptcy estate and available to pay your creditors. There are certain exemptions such as joint refunds where only one spouse files bankruptcy and refunds from the earned income tax credit. Bankruptcy trustees will ask all debtors if they expect a tax refund based on their 2009 tax return, and in most cases will require the debtor to send a copy of the 2009 tax return whenever it is filed.

I read a good blog post from Ohio bankruptcy attorney Wayne Novik about how debtors can best protect tax refunds. One option, discussed in the post, is simply to delay filing bankruptcy until you have filed your tax return and received a refund. You can spend your tax return on necessary expenses such as past-due mortgage or car payments or your bankruptcy attorney fee. Of course, if you receive a large tax refund the trustee may ask you to account for the money. As a practical matter, if you expect a small tax refund the Chapter 7 trustee will decide its not worth pursuing and will let you keep the money.


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