Tax Time! What happens to your tax refund in bankruptcy?

The number of bankruptcy filings tends to decrease during the first quarter of the year (January through March) and then pick back up again through the rest of the year until the Holidays. The theory behind this is that people do not want to file for bankruptcy in the first few months because they do not want to lose their tax refund. Clients sometimes use their tax returns to pay attorney fees and filing fees for bankruptcy, which explains why the filings increase in the second quarter of each year.

So let’s take a look at what happens to your tax refund in bankruptcy.

Tax refunds in Chapter 13 bankruptcy: anything over $1,000 goes to your creditors.

Treatment of tax refunds in Chapter 7 bankruptcy and Chapter 13 bankruptcy are different. We’ll take a look at Chapter 13 cases first because they’re less complicated. So, how do tax returns work in Chapter 13 bankruptcy?

(If you’re not familiar with how Chapter 13 plans work, you may want to take a look at my previous posts about Chapter 13 bankruptcy, and Chapter 13 plans before reading on.)

If you are receiving a refund at tax time, then it is usually “extra money” in the sense that it is not included in the budget you filed with the court when you entered Chapter 13 bankruptcy. And because it is “extra money” it is sometimes subject to seizure by the trustee, and will be put towards repaying your creditors.

However, treatment of tax returns under Chapter 13 is relatively advantageous. In Utah, Chapter 13 plans generally include a provision that the debtor must show the trustee her tax returns each year, and must surrender any return over $1,000. So the good news is, you get to keep up to $1,000. And the other good news is that, even if you do have to give a portion of the refund up, it goes toward the arrearages, and other debts you owe in the bankruptcy, and it could help you complete the plan sooner!

Tax returns in Chapter 7 bankruptcy: the trustee is entitled any tax refund you would have accrued prior to filing, but sometimes it’s not worth it for them to bother taking the refunds.

As I mentioned, treatment of tax refunds in Chapter 7 bankruptcy is more complicated than Chapter 13. In short, what happens to your tax refund when you file under Chapter 7 depends on the time of year, amount of the refund, and part of the state you’re in, and trustee assigned to your case. I’ll try my best to demystify everything for you.

(Also, I should quickly remind everyone that this information applies only to bankruptcy in Utah. That is where I practice, and where I have experience dealing with tax refunds. This is one area of bankruptcy law where there can be really big differences between jurisdictions. So please keep that in mind as you read.)

First off, take a look at my previous posts discussing Chapter 7 bankruptcy if you are unsure of the difference between Chapter 7 and Chapter 13. A short summary is: when you file under Chapter 7, everything you own is transferred into a “bankruptcy estate”. The bankruptcy estate includes tax refunds, since it is money that would go to you – and then maybe to your creditors – if you had not filed bankruptcy.

So technically, the trustee has a right to your tax refund from last year, if you haven’t received it yet. And the trustee also has a right to any portion of the tax refund you would have accrued prior to filing bankruptcy. So, for instance, if you make a regular salary, and you file bankruptcy in July, half-way through the year, the trustee has a right to keep half of your tax refund.

In practicality, however, the trustee will sometimes not bother keeping track of you in order to claim her portion of your tax return. If you are waiting to receive a tax refund, but it is small, the trustee may not bother keeping it. If the trustee believes that your upcoming refund will be small, based on looking at your recent tax returns, then she will probably not require you to show her your upcoming tax returns.

Treatment of tax refunds in Chapter 7 is a judgment call for trustees, and different trustees will be more or less stringent about collecting them. That is why it makes a difference where you’re filing and which trustee is assigned to your case. (An aside: Chapter 7 trustees are appointed from a pool of dozens of attorneys, as opposed to Chapter 13, in which the same trustee’s office handles all Chapter 13 cases in the state. This makes things in Chapter 7 less predictable.)

The good news is, if it’s the first quarter, and you’ve already received (and spent) your tax refund, the trustee will not be able to take it from you (with some notable exceptions). On the other hand, if you filed chapter 7 during the time between filing your tax return and receiving your refund, you will probably have to turn it over to the trustee.

If you’re filing bankruptcy in the middle part of the year, then it will depend greatly on the trustee and the amount of the refund. If you’re expecting a large refund, then you should prepare to be giving at least some of it to the trustee at tax time.

That’s all for today, but be sure to check the rest of the posts on this site for more information about Utah bankruptcy law. Click here to visit my website, or call (801)200-3795 to discuss your financial trouble, I’m glad to help!

A Chapter 13 Bankruptcy Attorney explains the Chapter 13 plan, Part IV: median income, disposable income and liquidation analysis.

In Part III I discussed a basic formula for determining how much your Chapter 13 plan monthly payment could be. In this part I’m going to go into more depth about a few “hitches” that can affect both the amount of your plan payment, and the length of your plan.

Hitch #1 – Utah’s median income may affect length of your Chapter 13 plan.

Generally speaking, a Chapter 13 payment plan cannot be less than 3 years long (36 months), nor longer than 5 years (60 months). If your average monthly income over the six-month period prior to filing bankruptcy is below the median income for your state and family size, then you can choose 36 months or 60 months…or any number of months in between. The advantage of this is that you can increase or decrease your monthly payments according to your disposable income so that you have either a shorter plan period, or a shorter monthly payment than you would if you were forced to adhere to a certain plan length. (I’ll discuss why this is important below)

If, on the other hand, your average monthly income over the 6 month period prior to filing bankruptcy is above the median income for your state and household size, then you are required to make a 5 year plan.

Hitch #2 – You will have to commit all of your “disposable income” to your Chapter 13 plan payment.

When you enter a Chapter 13 plan, you will be required to commit all of your disposable income to your plan payments. As unfortunate as this sounds, there is a logic behind it. The thinking goes that if you are going to be enjoying the protection of the Bankruptcy Code, and you are preventing your creditors from accelerating payments, foreclosing liens, getting judgments, etc. Then you had better be paying them as much as you can afford – it’s only fair.

So when you fill out your petition you will be documenting your current income and your current expenses. The amount by which your current income exceeds your current expenses is your “disposable income”. If your disposable income is less than your proposed Chapter 13 bankruptcy plan payment, then your plan will not be confirmed. You’ll have to either adjust it, or convert your case to a Chapter 7 bankruptcy.

On the other hand, if your disposable income is greater than your proposed plan payment, then the trustee will most likely make you increase your Chapter 13 plan payment amount. This is one of the advantages to being under the median income level, and thus having the option to shorten the length of your plan up to 36 months. Since your total secured debts, attorney’s fees, and trustee’s fees are all you “have” to pay through a Chapter 13 plan, (“liquidation analysis” is a caveat to this as well, which will be discussed below) if your disposable income is greater than your plan payments would be under a 60-month plan, then you can simply shorten the plan to the point where your monthly payment is equal to your disposable income. That way you pay as little as possible (zero) to your unsecured creditors.

But if you have to have  a 60 month plan because you are above median income, then you are going to end up paying every cent of your disposable income, and some of it is going to end up going to your unsecured creditors. What this means is that your Chapter 13 bankruptcy will “cost” you more than if you were below median income.

Hitch #3 – Liquidation Analysis

There is one final thorn that can become caught in your side when it comes to determining the amount of your Chapter 13 bankruptcy plan payments, and that is the rule of liquidation analysis. The rule is that, since your unsecured creditors in Chapter 13 are already being forced to accept little or no payment on your debt to them, it is unfair for them to be “worse off” than if you had filed a Chapter 7 bankruptcy case. I.E., your unsecured creditors in a Chapter 13 case must be paid at least as much as they would have been paid if you had filed a bankruptcy petition under Chapter 7.

Most Chapter 7 cases are “no asset” cases, meaning that there are no assets for the trustee to liquidate, and the unsecured creditors will not receive any payment on their debts. However, Chapter 13 bankruptcy is an attractive option for people who have equity in assets they’d like to keep possession of, such as cars and houses, so often times there are assets in Chapter 13 cases. So when you file a Chapter 13 plan, you have to do a “liquidation analysis” – you have to compute how much equity you have in your non-exempt assets and determine how much your unsecured creditors would receive  if you were filing under chapter 7 instead of chapter 13.

By way of illustration, lets take our previous example of the person who is $3,600 behind on his mortgage. We figured that, over the life of his chapter 13 plan, he would have to pay just over $7,300. Lets assume that our imaginary client has a car that he owns “free and clear”, it is completely paid off. Lets assume the car is worth $5000. Now, if this person were to file Chapter 7 bankruptcy, he could exempt $3000 of the value for the car, but the other $2000 would go to his creditors. This person would either have to allow the trustee to sell the car, or he would have to “buy” the car from the trustee for the $2000 it is worth beyond his exemption. That $2000 would then be distributed to the hypothetical client’s unsecured creditors.

Thus, a liquidation analysis of this client’s situation would tell us that his chapter 13 plan would have to include at least $2000 for his unsecured creditors because they cannot be “left worse off than if he had filed under chapter 7.” Thus, his Utah Bankruptcy Attorney would be charged with giving him the unfortunate news that, instead of paying $7,300 over 60 payments, he’ll have to pay $9,300 over 60 payments; $155 per month instead of $122 per month.

In our hypothetical case, the $30 per month increase may not seem budget-breaking. But you can imagine how having lots of equity in something more valuable, like real estate, could mean a much higher plan payment.

Please consult a Salt Lake City bankruptcy attorney if you’re considering bankruptcy, and any of these 3 hitches sounds like it might apply to you. I’ve done my best to explain these complications quickly, but there are lots of nuances that I’ve left out!

As always, Click here to visit my website and contact me to discuss your financial trouble, I’m glad to help!

A Chapter 13 Bankruptcy Attorney explains the Chapter 13 Plan, Part III: how much will my plan cost?

In Part I, I explained the basic concept of chapter 13 bankruptcy. And in Part II, I got into some detail about secured debt versus unsecured debt, and how it affects your chapter 13 plan. Now I’m going to get into what you are probably most concerned with considering chapter 13 bankruptcy with an attorney in Salt Lake City: how much you’re going to have to pay. So let’s get to it. 

Chapter 13 Bankruptcy battle plan

Your chapter 13 bankruptcy battle plan.

The (overly) simplified formula for monthly payment amount:

(secured debts in arrears + Chapter 13 attorney fees + Chapter 13 trustee fees)/60

If you have a very basic case, then this formula will get you a good idea of what you’re looking at. Let’s continue using our previous example of the person who is $3,600 in arrears (behind) on their mortgage payment. We’ll assume that the mortgage payment is the only secured debt this person is behind on; although this is usually not the case. Clients of mine are often behind on second mortgages, as well as car payments and other secured debts in addition to their mortgage. 

Next we get to Utah chapter 13 attorney fees. The good thing about chapter 13 is that there are statutory fee amounts, and your Utah bankruptcy lawyer will generally stick to those amounts. In Utah, attorney’s fees are going to be $3,000, $3,250, or $3,500 depending on the complexity of your case and amount of debt you have. Generally your attorney will require a down payment up front, and what that amount is can vary widely from attorney to attorney, and is also dependent on your individual circumstances.

By way of quick advertisement, I am currently offering Chapter 13 bankruptcy for only $200 down, which is a great deal. Depending on when you read this article, I may not be offering this any more. But, you should give me a call (801.200.3795) and mention this post to find out! 

 

So, to get our second number we’ll take the statutory attorney fee (we’ll assume the usual $3,250), minus the downpayment (we’ll assume $200 according to my current special), which gives us a remaining fee of $3,050, which will be payed over the life of the plan along with the mortgage arrears. 

Finally, we add the trustee’s fee. Assume the trustee’s fee is 10% of your plan payment amount. Performing the arithmetic to technical perfection can be tricky. Here, we’re just trying to get a basic idea, so we’ll just take 10% of the sum of the secured arrears and attorney fee. (3600+3050)x0.10=665

Our final formula for our hypothetical person is: [(3600+3050+665)/60]. This comes out to a monthly payment of just under $122 per month. So, our hypothetical person will be paying their regular mortgage, plus $122 per month to catch up their back mortgage payments over a period of 5 years. At the end of this period, their mortgage and other secured debts will be caught up, and any unsecured debt they have, including thousands in credit card and medical bills will be discharged (erased!).

Sounds like a situation that could help that person out quite a bit right? And often times, my clients end up with a payment plan similar to this. However, I am assuming a very basic case here, and there are many many nuances that could make this plan turn out quite a bit different. This article is getting a bit long, so check back and I’ll discuss those nuances in Part IV. For now, here’s a bullet list of the gravestones I’m whistling past: 

  • Plan length – the plan may be shorter, and the payments larger. 
  • Amount due to unsecured creditors – in some cases, clients will be required to pay back a portion of their unsecured debts
  • Disposable income – in general, clients will be required to pay all of their disposable income into the plan. Thus, how disposable income is calculated becomes very important – and is one of the reasons you really need a Chapter 13 bankruptcy attorney if you’re filling bankruptcy in Utah. 
Click here to visit my website and contact me to discuss your financial trouble, I’m glad to help!

A Chapter 13 Bankruptcy lawyer explains the Chapter 13 plan. Part II: treatment of secured and unsecured debts.

Hey folks! in my previous post, I explained the basics of the chapter 13 plan, click here to read that. Now lets get into some more detail.

Let’s keep using our example of a person who’s got a $3,600 arrearage, but we’ll make it a bit more realistic, shall we? Because no one who comes to see me about bankruptcy is behind on just one debt. There are usually some credit cards, and some medical bills mixed in. So imagine this person is $3,600 behind on their mortgage, but they’ve also got $8,000 of credit card debt and $10,000 dollars of medical bills. That means they’ve got $21,600 of debt. In a three year plan, would they have to pay all of that off, plus keep making their mortgage payment, because that would cost them $600 per month on top of their mortgage!

The good news is that is not how it works. The person in our example does not necessarily have to pay back all of credit card debt and hospital bills. In fact, in many situations they may not have to pay back any of the credit card and medical bills. This is because of the difference between secured and unsecured debts – the chapter 13 debtor must pay back all the arrearage on her secured debts, but does not necessarily have to pay back all of their unsecured debts.

A secured debt is a debt that is backed by some type of collateral. The most common examples are mortgages and car loans. Loans used to buy furniture, or for house repairs, etc may also be secured in some instances. These loans are called “secured” because the debt is secured by the item of collateral. Thus if the debtor defaults (stops paying), the creditor can sell the collateral and get their money back. That is what happens when a house is foreclosed or a car is repossessed.

Debts like pay-day loans, utility bills, medical bills, and credit card bills are not backed by any collateral, and are thus “unsecured”. In a Chapter 13 plan, you must pay all the back payments on secured debts over the life of the plan, but how much you pay to the unsecured creditors depends on your income and the plan length. Sometimes you pay nothing at all to the unsecured creditors.

Check back next time, we’ll discuss how you income affects the plan length and payment amount.

Click here to visit my website and contact me to discuss your financial trouble, I’m glad to help!

A Chapter 13 Bankruptcy lawyer explains the Chapter 13 plan: Part I.

Ninety-nine percent of the individuals who file bankruptcy will be filing either a chapter 7 or a chapter 13. This means that there are only two different kinds of bankruptcy for you to consider – and that is great news right? But beware, because, although there are only two different types of bankruptcy that apply to your situation, the two types are very different, and you want to choose wisely.

I’ve discussed the differences between chapter 7 and chapter 13 bankruptcy in the past here, so check that out if you’re curious. But in this post I thought I’d explain how the Chapter 13 plan works: how it is computed, what it covers, how long it lasts, etc.

In the most basic sense, what you are doing when you file Chapter 13 is you are saying, “ok, I’ve gotten behind on my debts, and I want to create a plan to pay off what I’m behind on over time.” For example, imagine you have a mortgage, you have gone through a rough patch financially, and you are several months behind. But you want to get back on your feet, and you want to keep your house out of foreclosure. Imagine you owe $3,600 in back mortgage payments. This means that the mortgage is “in arrears” and that the “arrearage” is $3,600. When you enter a Chapter 13 bankruptcy, your Chapter 13 plan must pay off the arrearage over the course of the plan. So, if you have a three year plan, you must pay $100 per month into the plan, as well as continue to pay your regular monthly mortgage payments.

Now, that is a basic explanation – there are a few caveats and complications. And in the next post I will discuss those in more depth.

In the meantime, if you are falling behind on your debts, click here to contact me for a free consultation. There’s no reason not to talk to an experienced bankruptcy lawyer and find out what your options are.

I feel like I’m beating a dead horse here…but get a Utah bankruptcy attorney to help you file bankruptcy – PLEASE don’t do it yourself.

So, I’ve said it before, and I’ll probably say it again a number of times, but you really do need to get a Utah bankruptcy attorney to help you with filing bankruptcy unless you have some special knowledge or skills. Bankruptcy is one area of the law where people frequently try to represent themselves – and they really shouldn’t.

Now, I realize that coming from a bankruptcy lawyer in Salt Lake City, you might not trust me when I say you need to hire…well…me. So that’s why I’m just going to relate a situation that I witnessed in a hearing this week:

I was in the United States Bankruptcy Court for the District of Utah, in a particular Judge’s courtroom waiting for a hearing for one of my clients, when the judge called a Chapter 13 bankruptcy case up. A middle-aged man, the only one in the room not wearing a suit, stood up and walked to the front of the room. The hearing was on a motion by the trustee to dismiss this man’s case without a discharge. It was obvious that the man was representing himself.

Now, first of all, I can’t imagine how nervous he must have been. Waiting in a room full of lawyers to talk to a federal judge. I get a little nervous sometimes…and I’m one of the lawyers! 

Fortunately, the judge was very nice to this man. Unfortunately, the judge could not help him out. What had happened was that the man had neglected to file certain documents in connection with his case. Given that there are so many very specific and important deadlines and documents that must be filed, it is understandable that he missed one of them…you know since he’s not a friggin’ attorney – he doesn’t know these things. But the thing is, it doesn’t matter in the eyes of the law. When a deadline like this is missed, and the trustee files a motion to dismiss the bankruptcy case (and they always do), the judge is bound by the law to grant the motion.

The judge was as nice to this man as he could be, but informed him that he had no choice but to grant the motion to dismiss, and that the man would have to start all over again.

What are the consequences for this man? The loss of a $287 filing fee, and probably dozens of hours of research and paperwork done in vain.

Before he left the JUDGE (not the Utah Bankruptcy Attorney trying to get your business :)) said, “You really need to find someone to advise you on these things, someone who knows what they’re doing. It is very rare for someone representing themselves in a Chapter 13 bankruptcy to make it through without messing something up.”

I would contend that it is just as important in a Chapter 7 bankruptcy as well. In fact, the documents and deadlines this man missed are applicable in chapter 7 cases as well, so he wouldn’t have made it through doing his own Chapter 7 Bankruptcy in Utah either!

If you’re looking for a Salt Lake City, Utah Bankruptcy Attorney, look no further! Click here to visit our website, or call 801.200.3795 for a free consultation, we service all of Utah.

Utah Bankruptcy Rates down 13% this year! OMG, Utah Bankruptcy Attorneys are freaking out!

Well, us Utah Bankruptcy Lawyers have had a good run, eh? With the recent, prolonged recession and the collapse of the housing industry, bankruptcy and foreclosure rates have been at all time highs across the country for several years. And it seems that local Salt Lake County, Davis County, and Utah County rates are just as high or higher than the national averages.

It may all be coming to an end, which is great news for Utah families that have been weathering this storm for a long time. It looks as though unemployment levels are poised to drop back down; and the fact that bankruptcy filings are down nationwide is encouraging. Utah bankruptcy filings for the first 6 months of 2012 are down 13% from the last year. That’s quite a bit, huh? Nationwide, bankruptcy filings are down 14%!

It’s great to get some good news, but before we all go and and buy a new Land Rover…the data doesn’t all point in the same direction. While unemployment has fallen this year, the ground gained has been underwhelming at best. And what is particularly discouraging about the bankruptcy filing statistics is that Utah foreclosure rates have not dropped. If foreclosures continue to remain high, bankruptcy filings will come back up – and this will just be a short lived break.