About Me
“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
Tax and Bankruptcy Issues
Written by Craig D. Robins, Esq.There are many types of debts that can be discharged in a Chapter 7 bankruptcy filing. Most consumers seek to discharge credit cards debts, medical bills, loans, etc. Some consumers have the Social Security Administration (SSA) chasing them down as well.
This is because the SSA, after they paid benefits to a particular consumer, determined that they paid too much for one reason or another, and they demanded the consumer to pay the overpayment back. What happens most frequently is that the applicant, who was receiving Social Security benefits, goes back to work but the SSA continues to make payments.
When the SSA learns that there has been an overpayment, it makes a demand that the overpayment be repaid within 30 days. These overpayments can add up to a sizable amount. Can this type of obligation be discharged in a bankruptcy filing?
Yes. In general, Social Security overpayments can be eliminated by filing for Chapter 7 bankruptcy. They can be treated as typical unsecured debt in Chapter 13.
Although claims owed to some governmental entities are entitled to special treatment in a bankruptcy filing, the Social Security Administration is not. They are treated like any other general unsecured creditor. That means that a consumer seeking Chapter 7 relief can discharge a debt owed to the SSA.
However, all creditors have the ability to challenge discharge if it appears that the debtor incurred the debt through fraud or fraudulent pretenses. The SSA technically has the right to object to discharge if it appears that the debtor knew or should have known that he or she was not entitled to the Social Security benefits.
That being said, I have never seen an instance of the SSA challenging discharge in my 25+ years of practicing consumer bankruptcy on Long Island. Nevertheless, it would be wise to consult with an experience bankruptcy attorney if you owe Social Security debt.
Once a bankruptcy petition is filed, the SSA must immediately stop all proceedings to collect the overpayment. Not only is this statutory bankruptcy law, it is also SSA policy on bankruptcy filings.
Written by Craig D. Robins, Esq.One of the most important features of any bankruptcy filing is the automatic bankruptcy stay. This is the very powerful federal law that prevents any creditor from taking any action to collect a debt once any bankruptcy case is filed. It goes into effect immediately upon the filing of any bankruptcy case.
When it comes to tax debt, the automatic stay requires tax authorities to stop collection activity and release any tax levies.
The Co-Debtor Bankruptcy Stay
When a consumer files for Chapter 13 bankruptcy relief, the stay also protects any other individuals who are also obligated on the debt, even if they did not seek bankruptcy relief. This is set forth in Bankruptcy Code section 1301.
Thus, if a husband files for Chapter 13 protection and the wife does not, and the husband listed a credit card debt that they both signed for, then the bankruptcy stay protects both of them from collection efforts — even though the wife did not file.
The co-debtor stay only exists in Chapter 13 cases — not in Chapter 7 cases.
Co-Debtor Stay Only Applies to “Consumer Debts”
However, this protection only applies to “consumer debts.” Fortunately, the definition of consumer debts include almost all debts that the typical consumer would schedule in their bankruptcy petition — credit card obligations, car loans, mortgages, and medical debts.
The Bankruptcy Code does not define consumer debts to include tax debts. A consumer debt is a debt “incurred by an individual primarily for a personal, family, or household purpose.” Most bankruptcy court decisions have held that tax debts are not consumer debts.
Thus, the co-debtor stay does not protect a non-filing spouse from efforts of the IRS or New York State Department of Taxation to collect the tax debt. Of course, the bankruptcy stay does protect the party who files for bankruptcy relief; it just does not protect anyone else from collections on joint tax debt.
Since taxes are not considered consumer debt and there is no co-debtor stay for tax debt, serious thought should be given to including both spouses in a Chapter 13 filing when the joint tax debt is substantial.
Written by Craig D. Robins, Esq.Recent Long Island Bankruptcy Court Decision Addresses How to Allocate Non-filing Spouse’s Share of the Tax Refund
(This post was my monthly column that was published in the September 2011 issue of the Suffolk Lawyer.)
April may be tax time for most consumers, but bankruptcy judges seem to address bankruptcy tax issues year round. That’s because tax refunds have been a constant and significant source of potential funds for trustees, who are often quite willing to litigate the issues involved.
However, with the increased bankruptcy exemptions in New York, perhaps there will be fewer tax refund disputes.
In the past two years, I devoted many blog posts to issues concerning tax refunds and bankruptcy.
I also devoted two columns of my monthly articles published in the Suffolk Lawyer to the topic of tax refunds of non-filing spouses. A recent decision by Central Islip Bankruptcy Judge Robert E. Grossman here in the Eastern District of New York now requires that I write monthly third column on the subject. First, let me provide some background on the other two cases.
The 50/50 Rule for Allocating Tax Refunds in Bankruptcy Cases has been the Previous Standard in New York
In my May 2009 column, I raised the issue: Who owns the non-filing spouse’s tax refund in a bankruptcy case, and how do you apportion it?
The Marciano case out of the Southern District of New York adopted the 50/50 Rule — a simple and straight-forward approach in which the refund is apportioned equally between the two spouses regardless of the source of income or tax withholding. In re Marciano, 372 B.R. 211 (S.D.N.Y. 2007). Local bankruptcy practice since that time has adopted that rule.
Non-Filing Spouses Do Not Have to Contribute Their Share of the Tax Refund into the Chapter 13 Plan
In December 2010, I focused my column on a decision by Judge Grossman which addressed this issue: What happens when only one spouse files for Chapter 13 relief? Does the non-filing spouse also have to surrender his or her tax refund to the trustee?
At the time, Judge Grossman held that a non-filing spouse is not obligated to devote his or her share of a joint tax refund to plan payments made to the Chapter 13 trustee.
In that case, In re Malewicz, No 8-09-74807-reg, 2010 WL 4613119 (Bankr. E.D.N.Y., Nov. 4, 2010), the Court ruled that a non-debtor spouse’s share of a joint tax refund received post-confirmation is not property of the debtor’s estate or part of the “projected disposable income.”
Therefore, unless the non-debtor spouse specifically consents to contribute the refund to the plan, the non-debtor spouse’s share of tax refunds received post-confirmation need not be turned over to the trustee.
Thus, the non-debtor spouse in that case was not required to devote his share of tax refunds to the Chapter 13 plan. The non-filing spouse’s share of the tax refund is not property of the estate and it should not be included in the calculation of Chapter 13 plan payments.
At the time, the Malewicz case seemed to be the end of the road on the issue. You had the 50/50 rule, so what else could come up?
The Duarte Decision Introduces New Standard for Allocating Tax Refund
In October 2010, Carlos Duarte, a typical consumer, filed for Chapter 13 relief individually, without his wife. Through his attorney, fellow Long Island bankruptcy lawyer Lawrence S. Lefkowitz, he offered 50% of the couple’s joint 2010 tax refund into the plan and asserted that the other 50% belonged to his wife, and was hers to keep.
After all, the 50/50 Rule, for determining each spouse’s respective rights to a tax refund, is a test employed by a majority of Bankruptcy Courts in New York.
The debtor also pointed out a 2009 decision by Judge Alan S. Trust which held that “spouses filing joint returns who equally share the liability for payment of the taxes, should equally share the benefit of any tax refund.” In re Spina, 416 B.R. 92 (Bankr. E.D.N.Y. 2009).
However, Long Island Chapter 13 bankruptcy trustee Michael J. Macco noticed an unusual aspect of the family’s tax situation: only the husband paid withholding tax during the 2010 tax year; the wife did not pay anything.
The trustee then objected to confirmation of the plan, arguing that the entire 2010 refund resulted from an overpayment made solely by the debtor-husband.
The trustee argued that there was only a presumption that the 50/50 Rule should be used, and that the facts of this case rebutted the presumption. He insisted that the debtor pay 100% of the tax refund into the Chapter 13 plan based on a different rule known as the “Withholding Rule.”
Under the Withholding Rule, which is considered the majority approach, the tax refund is divided based upon the extent to which the refund is attributable to the separate withholdings of each spouse.
At the confirmation hearing, Judge Grossman granted confirmation, but reserved decision as to whether the non-filing spouse was required to turn over 50% of the tax refund.
New “Separate Filings Rule” Now Governs Allocating Spouse’s Tax Refunds in Bankruptcy Cases
In a decision issued in July 2011, Judge Grossman ruled that neither the 50/50 Rule should be applied, nor the withholding Rule. Instead, he adopted a totally different formula known as the “Separate Filings Rule,” first enunciated by the Tenth Circuit in the case, In re Crowson, 431 B.R. 484 (10th Cir. BAP 2010). In re Carlos Duarte, no. 8-10-78606-reg, (Bankr. E.D.N.Y. July 12, 2011).
The Judge clarified the issue before the Court: since the debtor consented to turn over his share of the tax refund, the sole issue was determining how to calculate the debtor’s interest in the tax refund.
After reviewing in detail the considerations for rejecting the other rules (there are four of them), Judge Grossman held that it was necessary to use a formula based on a calculation of what each spouse’s tax obligation would have been if the spouses had filed separate tax returns.
Then, he said there should be a calculation of the contributions each spouse had actually made towards the total tax payment.
Unfortunately, this new method will be messy and the Judge even pointed out that this approach “is not a ‘bright-line rule’ and therefore it is not simple to understand or apply.”
The Judge stated that “This Court is not ruling that the Trustee, the debtor and the non-debtor spouse in each case must undertake this analysis in order to determine each parties’ interest in a joint income tax refund, but this formula shall be employed where the parties do not agree on the proper allocation.”
Judge Grossman’s “Separate Filings Rule” approach will certainly produce the fairest result to all concerned, but if the parties cannot reach a resolution, they’ll certainly have a fair amount of work on their hands and they’ll have to study the formula details set forth in the Duarte and Crowson cases.
I recently spoke with the debtor’s attorney who had just prepared the separate tax returns (for bankruptcy calculation purposes only), and he was optimistic that he and the Chapter 13 trustee would work out a resolution as to the actual numbers without the need for further litigation.
Future Bankruptcy Court Decisions on Tax Issues Ahead?
On a separate note, I anticipate we may see another bankruptcy tax case in the near future. The Court did not address whether the Bankruptcy Code requires a debtor to turn over pre-confirmation tax refunds as opposed to post-confirmation tax refunds. Judge Grossman went so far as to point this out in a footnote.
Since I have seen this issue arise several times recently, I wouldn’t be surprised to see this issue come before the Court in a case where the parties cannot reach a resolution on their own.
NOTE: You can review copies of some of the actual decisions I cited in this post by clicking on these links: In re Carlos Duarte, In re Spina, In re Malewicz.
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About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the September 2011 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, Esq.Tax Refunds can be a big deal when factored into a bankruptcy filing — for two main reasons.
Be Mindful of the Bankruptcy Exemptions for Tax Refunds
First, tax refunds can only be protected up to a certain amount. When you file for bankruptcy, you can protect various assets, and tax refunds is one of them — but only up to a certain amount.
In what is very good news for New York residents, the exemption for tax refunds will increase after January 23, 2011. See: The New, New York Bankruptcy Exemption Statutes for 2011 . I will post a detailed article in the next few weeks about protecting a tax refund while utilizing the new, New York state exemption.
Basically, each person who files who need to protect their home with a homestead exemption, can also protect up to $1,000 worth of cash, money in the bank, and tax refunds.
For those who do not need the homestead exemption, they may be able to use the federal exemptions, which up until now has not been a choice for New York bankruptcy filers. The federal exemptions provide for a wildcard exemption that can enable you to protect other miscellaneous assets up to $11,975 per person That is very generous!
Be Wary of the Effect of the Refund on the Bankruptcy Means Test
Second, the tax refund is considered income for purposes of calculating the means test, and adding the tax refund to the means test can make it harder for some people to become eligible for Chapter . For those filing Chapter 13, a tax refund can result in having to pay a larger Chapter 13 monthly payment. See: How a Tax Refund Can Mess Up Your Bankruptcy Means Test
Tax Refunds and Bankruptcy is such an important topic that last year I devoted an entire week’s worth of posts to the subject: Tax Refunds and Bankruptcy — Everything You Need to Know . I will write a few additional posts this year.
Be Careful How You Spend Your Refund If You Are Planning to File for Bankruptcy
In the meantime, if you get your tax refund, be careful how you spend it. You should not repay any loans to friends or family members because doing so could be considered making a “preferential payment.”
A preferential payment is when you “prefer” a certain creditor, even unintentionally, and that creditor gets more than he or she would have gotten otherwise. If you file bankruptcy within a year of paying back a family member, under certain circumstances, the bankruptcy trustee has the right to sue the family member to recover the money and bring it back into a “bankruptcy estate” so that it can be distributed in a fairer manner to all creditors.
Also, don’t spend the money frivolously by taking a vacation or buying luxury goods. Doing so can be considered inconsistent with the good faith necessary to receive a bankruptcy discharge.
So what can you spend your refund on? Bankruptcy attorney’s fees is one. Many of my clients are able to file for bankruptcy relief in the Spring, because that is when they typically receive their tax refund.
Tax refunds can also be spent on household repairs, car repairs, food, clothing, mortgage or rent payments, car payments, property taxes, fuel oil, child support arrears and some other reasonable items. However, seeking advice from an experienced bankruptcy attorney is your best bet.
Written by Craig D. Robins, Esq.
Pro-Se Litigant Scores Victory Against Chapter 13 Trustee Over Tax Refund Issue
When it comes to post-petition tax refunds in Chapter 13 bankruptcy cases, the long-standing practice in this jurisdiction for debtors who propose to pay unsecured creditors less than 100%, is to surrender to the trustee all tax refunds the debtor receives during the pendency of the bankruptcy case.
Every experienced consumer bankruptcy practitioner who practices on Long Island is keenly aware of this “requirement.”
However, what happens when only one spouse files for Chapter 13 relief? Does the non-filing spouse also have to surrender his or her tax refund to the trustee?
Recently, Chapter 13 trustee Michael Macco of Melville said “yes” to this question and threatened to dismiss a confirmed Chapter 13 plan filed only by the wife, unless the non-filing husband cooperated and turned over the entire joint tax refund.
The trustee argued that inherent in the debtor’s obligation to turn over all post-petition tax refunds, was an obligation by the non-debtor spouse to do the same, so that the debtor’s creditors would then receive a distribution from these funds.
The husband refused to do so, went to a law library, and then brought a pro se motion seeking a determination that his share of the tax refund should be protected. He did this two months after writing a letter to the judge expressing frustration over what he perceived to be an extremely unreasonable request from the trustee.
In an affidavit in opposition that was barely longer than one page, the Chapter 13 trustee argued that: a) the debtor chose to file a joint tax return; b) there is no mention in the Chapter 13 plan that there can be an exclusion for the non-debtor spouse’s tax refund if the debtor files a joint return; and c) the Bankruptcy Code requires the debtor to pledge all household income to pay unsecured creditors.
The husband and trustee had oral argument before Central Islip (Eastern District of New York) Bankruptcy Judge Robert E. Grossman in August, who reserved decision. The Judge delivered an oral decision at a subsequent hearing in September.
Judge Grossman then issued a detailed written decision last month, on November 4, 2010. It held that the trustee had no basis, either at law or under the terms of the plan, to compel the husband, as a non-filing spouse, to turn over his property to the trustee, or to hold the debtor in default for the husband’s failure to do so. In the Matter of Susan Malewicz, no. 09-74807-reg, (Bankr. E.D. New York 2010).
Why Do Debtors Have to Turn Over Tax Refunds?
Judge Grossman first addressed the concept of why Chapter 13 trustees require debtors to turn over their tax refunds. Apparently, Chapter 13 trustees claim that if a confirmed plan does not require a debtor to turn over tax refunds, debtors may manipulate deductions on their W-2 forms which would have the effect of reducing monthly income payable to creditors through the plan.
Mindful of the potential for abuse, bankruptcy courts have found that turnover of a debtor’s post-confirmation tax refunds is appropriate under the following situations: when they are property of the estate; when they are included in “projected disposable income” which means they must be committed to the Chapter 13 plan; and/or when the terms of the plan provide for such turnover.
Spouse’s Tax Refund Not Property of the Bankruptcy Estate
The Judge determined that Bankruptcy Code Section 541(a)(2) and 1306(a) are the relevant statutes that determine what is property of the estate in a Chapter 13 case. He then found that there is no provision in the Code that includes a non-debtor spouse’s property as being included in the debtor’s “property of the estate.”
Projected Disposable Income in Chapter 13 Bankruptcy Cases Does Not Include Non-Filing Spouse’s Income
Judge Grossman noted that other courts have permitted Chapter 13 trustees to require turnover of post-confirmation tax refunds under the theory that the refunds must be included in the calculation of the debtor’s “disposable income.”
Bankruptcy Code Section 1325(b) requires debtors to pledge all of “the debtor’s” projected disposable income in order for the plan to be confirmed. Here, the judge emphasized the wording which focused on “debtor” and ultimately found that a non-filing spouse’s entire income is not included in this analysis. “Nothing in the Code obligates anyone other than the Debtor to fulfill the requirements of the confirmed Plan.”
The Chapter 13 Plan Is Binding
Although the plan had the typical language that “the debtor shall pay tax refunds to the trustee,” the Judge found that this wording could not be interpreted to include the non-debtor spouse’s tax refunds.
The Judge also remarked that even though the husband signed an affidavit of contribution, indicating that he was contributing his income to the plan, it was not binding because it was not mentioned in the Chapter 13 plan.
Practical Tips – Don’t Be Steamrolled by a Trustee’s Argument
I actually called the debtor’s husband to get his take on what happened, as scoring a pro se victory over a Chapter 13 trustee is an impressive feat. He said that he felt very firmly that his position was correct and even went to a law library to do his homework.
As for bringing the motion, he said, “I was not afraid to go in and stand up for what was right. If I lose; I lose. I’m in no worse position than when I started.” No one can argue with that reasoning.
As I’ve indicated in some past articles, just because a trustee strongly and loudly enunciates a particular position does not mean the trustee is correct. Always consider presenting your issue to the Court if you believe you have a solid basis for doing so. As the debtor’s spouse said, you have nothing to lose. Congratulations to him!
Perhaps Debtors Do Not Have to Turn Over Tax Refunds — A Big Issue for Another Day
I was greatly intrigued by one particular statement that Judge Grossman inserted in the decision: “The parties have not raised, and this Memorandum Decision does not address, whether it is appropriate for the Trustee to require the turnover of the Debtor’s post-confirmation tax refunds.
This leads me to ponder if the Judge questions whether Chapter 13 debtors should uniformly commit their tax refunds to the plan. Perhaps there are some exceptions to our local practice. This would certainly be a major issue, but that is a subject for another day.
About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the DECEMBER 2010 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
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Quick Links to Tax Week Blog Posts About Tax Refunds and Bankruptcy
This past January, for an entire week, I posted a series of articles every day about tax refunds and bankruptcy. Here are some quick links to these articles:
Written by Craig D. Robins, Esq.
Bankruptcy Questions I’ve Received About Tax Refunds During “Tax Week”
This is the final post of my of “tax week” series of articles this past week in which I addressed every aspect you’ll need to know about filing bankruptcy and protecting tax refunds, together with info on related issues. Links to all posts in this series are at the bottom of the page.
I’ve gotten some very positive feedback on the tax week. Here are some interesting comments and questions that I’ve received:
QUESTION: I’m about to file a Chapter 7 case; I haven’t filed my tax return yet; and I expect a large tax refund which is not totally exempt. Why don’t I just delay filing my tax return until my bankruptcy case is over?
If a trustee thinks that there may be a substantial tax refund, then he will hold the case open until you file the tax return and provide him with a copy. Thus, delaying the filing will only delay the conclusion for your bankruptcy case.
QUESTION: If I anticipate a large tax refund, why don’t I just submit a tax return that contains incorrect information that shows that I owe lots of tax (meaning that I will not get a refund); and then just amend the return after the bankruptcy case is closed and get the tax refund then?
Well this person certainly thought creatively. Very few people artificially fudge the figures on their tax return to pay more tax then they owe.
However, this approach is probably illegal under the federal tax law, as a taxpayer is obligated to provide correct information on a tax return. In addition, should the trustee learn that a debtor intentionally manipulated the figures on the tax return to “beat the system” and deceive the trustee, the debtor would likely be looking at a proceeding seeking to revoke the debtor’s discharge.
Bottom line: be honest and accurate when filing your tax return, just as you should be accurate and candid when providing info on your bankruptcy petition.
QUESTION: I recently filed a Chapter 7 bankruptcy and the trustee insists on seeing my tax return before closing my case. However, it will take foreever before I can do my tax return. Is there anything I can do to expedite having the trustee close my case.
Unfortunately, the answer is “no.” If the trustee thinks there may be a significant non-exempt tax refund, he will keep the case open until he can review the tax return. Your best bet is to file the return as soon as possible.
Quick Links to All Tax Week Blog Posts About Tax Refunds and Bankruptcy:
Informative Article About Eliminating Taxes in Bankruptcy:
Article About Tax Consequences and Bankruptcy:
Written by Craig D. Robins, Esq.
This post is part of a series of articles that I’ve written this week addressing every aspect you will need to know about filing bankruptcy, protecting tax refunds, and related issues. Links to all posts in this series are at the bottom of the page.
Tax Refunds in Chapter 13 Bankruptcy Cases Filed in New York
Generally, if you file for Chapter 13 bankruptcy in New York, you will be able to keep your tax refund if your Chapter 13 plan provides for a 100% payment to all creditors. If it does not, then you will have to remit any tax refund to the Chapter 13 trustee, who will include it in the distribution to creditors.
If you have a Chapter 13 plan that provides for a payment of less than 100% to unsecured creditors, then you will also have to remit all future tax refunds to the trustee for the period of the plan, which would probably be five years. Here’s why:
A debtor in a Chapter 13 case is required to pay all projected disposable income into the Chapter 13 plan. Tax refunds are considered additional income that the debtor has over-withheld. Thus, when this income comes in, it has to be paid into the Chapter 13 plan.
In those Chapter 13 cases where you have to submit your tax refund to the Chapter 13 trustee, there will be clear and explicit language in the Chapter 13 plan about this, which will also indicate that you are responsible for sending a copy of your tax return to the trustee at the same time that you file it.
TIP: The higher the number of exemptions that you provide to your employer on an IRS W-9 tax form, the less the witholding will be, and the smaller the tax refund. In sub-100% Chapter 13 plans, you will want to have as small a refund as possible, because any refund that you do end up receiving just goes to your creditors, and does not benefit you in any way.
Effect of Receiving Tax Refund Before Filing Bankruptcy: Possible Whammy on the Means Test
Yesterday I wrote about How a Tax Refund Can Mess Up Your Bankruptcy Means Test . Well, the same means test that is used in Chapter 7 cases to determine eligibility to file for Chapter 7 relief, is also used in Chapter 13 cases to determine the minimum amount that you have to pay into the Chapter 13 payment plan.
If you file a Chapter 13 petition in the six-month period after receiving a tax refund, then you must include the tax refund in the means test as income. This is because all income received during the six-month means test period must be listed, and income tax refunds constitute income for this purpsoe.
Even though the income tax refund can be pro-rated to reflect receiving it over a twelve-month period, it will nevertheless increase the amount you will have to pay in the means test. However, if you file your bankruptcy petition more than six full calendar months after receiving the tax refund, you do not have to include the tax refund, based on a strict interpretation of the law.
This means that most people who file for Chapter 13 during the second half of the year who have plans that pay less than 100% can expect to pay less into their Chapter 13 plans each month. This is not exactly a logical result, but it’s the result of a very poorly and ambiguously worded means test statute.
Quick Links to All Tax Week Blog Posts About Tax Refunds and Bankruptcy:
Informative Article About Eliminating Taxes in Bankruptcy:
Article About Tax Consequences and Bankruptcy:
Written by Craig D. Robins, Esq.
This post is part of a series of articles this week addressing every aspect you will need to know about filing bankruptcy, protecting tax refunds and related issues. To see all posts in this series to date, click this link: Tax Refunds and Filing Bankruptcy .
Effect of a Tax Refund on the Means Test
For purposes of the means test, a tax refund that is received during the six-month means test period, must be included as income for purposes of the means test.
Technically, the means test requires that you allocate the full tax year refund into a six-month period, which as the effect of doubling the amount of the refund, which can provide for a very unfair result, and can result in you failing the means test for this reason alone.
Fortunately, it seems to be the accepted practice to pro-rate the refund over a twelve-month period.
However, strictly construing the means test can sometimes help a debtor. If the tax refund is received outside of the six-month means test period, then technically it does not have to be included in the means test at all.
I’ve learned over the years from representing our Long Island bankruptcy clients, that including the tax refund in the means test or not can sometimes make the difference between passing the means test or failing it.
This underscores the importance of getting competent advice from an experienced bankruptcy lawyer before filing for bankruptcy.
Written by Craig D. Robins, Esq.
This post is the fourth in a series of articles that I’ve writtten this week addressing every aspect you will need to know about filing bankruptcy, protecting tax refunds, and related issues. Links to all posts in this series are at the bottom of the page.
What Should You Do If You Expect a Large Tax Refund, But Haven’t Filed the Bankruptcy Petition Yet?
TIP: Here’s where pre-bankruptcy planning becomes very important. If you expect a large refund, you may want to delay the filing of your bankruptcy petition until you receive the refund and spend it down in an appropriate manner.
Using a large tax refund to pay your rent or mortgage, buy food, make a car payment, or even pay your bankruptcy attorney, are all types of payments that are consistent with filing for bankruptcy in good faith. Sometimes the refund can also be used to buy necessary clothing or furniture, fix your house, repair your car, or get necessary dental work done.
However, you cannot pay existing debts to friends or relatives, give the money away, gamble it away, or buy luxury goods. In general, using it to pay any reasonable and necessary expenses is O.K.
Since pre-bankruptcy planning can be tricky in order to do it in a way that complies with the bankruptcy law, it is always best to seek the advice of a competent bankruptcy attorney before doing so.
Exempting the Tax Refund in the Bankruptcy Petition
If you need to file your bankruptcy petition before you recieve the refund, you must list it in the petition.
To protect your tax refund, you must exempt it by including it as an asset in the Schedule B, which is the Schedule of Personal Property, by stating the anticipated amounts of both the Federal and State refunds, and by listing the exemption and the correct exemption statute (New York C.P.L.R. section 5206) in Schedule C to the petition, which is the Schedule of Exemptions.
If you have to file your bankruptcy petition before preparing your tax return, then you will not know the amount of your refund (which is fairly common because most people don’t do prepare their tax returns until April). In such situations, you should nevertheless list it as “possible income tax refund for the 2009 tax year. . . . Amount $ – unknown -“
You May Be Able to Keep a Non-Exempt Tax Refund If It Is Small
Generally, trustees will only administer non-exempt assets if it is reasonable to do so. If the tax return is relatively small, it will probably be administratively inconvenient for the trustee to be burdened with all of the work necessary to distribute a very small amount.
I previously wrote a post about the issues a Chapter 7 trustee considers in deciding whether to take a debtor’s money or assets to distribute to creditors: Sometimes Debtors Can Keep Non-Exempt Assets in Chapter 7 Bankruptcy Cases .
Quick Links to All Tax Week Blog Posts About Tax Refunds and Bankruptcy:
Informative Article About Eliminating Taxes in Bankruptcy:
Article About Tax Consequences and Bankruptcy:
Written by Craig D. Robins, Esq.
This post is part of a series of articles this week addressing every aspect you will need to know about filing bankruptcy, protecting tax refunds, and related issues. Links to all posts in this series are at the bottom of the page.
Trustees Look Very Closely at Potential Tax Refunds at This Time of Year
The first four months of the year leading up to April 15th is tax season, and trustees will spend extra time and attention looking at the possibility of tax refunds to determine if they should be turned over. They also will continue to do so for a number of weeks thereafter.
Most people will not file their 2009 tax return until after mid-February. Thus, if your meeting of creditors is quickly coming up, you probably have not yet done your tax return. Many trustees will hold your case open until you do file last year’s tax return.
However, if your tax refunds in prior years were relatively small, and it appears that your tax refund for last year will also be small, then the trustee will likely close your case.
On the other hand, if you own your home and are claiming the homestead exemption, then any tax refund you receive will not be protected. In such situations, the Chapter 7 trustee will definitely want to hold your case open to see if you have any significant tax refund.
If you already filed your tax return and it shows that you will be receiving a large tax refund, and if the amount of the refund combined with your other liquid assets greatly exceeds the exemption amount ($2,500 per person), then the trustee will likely direct you to turn over your refund so that he can distribute it to your creditors.
If the trustee wants to keep your case open until you provide him with a copy of the bankruptcy petition, he will probably want your attorney to sign a stipulation which gives the trustee additional time to object to your case if you fail to comply or cooperate.
TIP: It is always best, if you are planning to file for bankruptcy, or if you have recently filed for bankruptcy, to file your tax return as soon as possible. That way, your bankruptcy attorney can review it and determine the best strategy for going forward with your case. In addition, you can minimize the amount of time the trustee will keep your bankruptcy case open for.
Suppose Your Tax Refund is Large and Non-Exempt, But You Filed Your Bankruptcy Petition Last Year
If the trustee appears entitled to the refund because it is not exempt, but you filed the return last year, the trustee should not take the entire refund. In such cases, the trustee is not entitled to any part of the refund that you earned after the date you filed the bankruptcy petition.
The Chapter 7 trustee will thus take a pro-rata portion of the refund based on the percentage of the year that has already passed at the time the petition was filed.
TIP: If you expect a large tax refund, you can minimize the possibility of having to turn this over to a trustee if you revise your withholding exemptions, so that less tax is withheld. Although it may be too late for some consumers to take advantage of this, those who read this post in the future can avail themselves of this tip. Speaking with an accountant about this is always best.
Quick Links to All Tax Week Blog Posts About Tax Refunds and Bankruptcy:
Informative Article About Eliminating Taxes in Bankruptcy:
Article About Tax Consequences and Bankruptcy: