How To File Taxes During Bankruptcy
For a small number of chapter 7 and chapter 11 debtors it may be appropriate and helpful to file two tax returns an individual Form 1040 return and a Form 1041 return for the bankruptcy estate.
The bankruptcy estate consists of all of the assets an individual owned on the date the bankruptcy petition was filed. It is treated as a separate taxable entity for individuals filing petitions under chapter 7 or 11 of the Bankruptcy Code.
Wipe Out Income Tax Debt With Bankruptcy
While the majority of taxes cannot be eliminated through bankruptcy, some can. The bankruptcy experts at Burr Law Office can examine your case to see if your tax debt can be eliminated. Though not simple, filing for Chapter 7 bankruptcy and finding out if your debts qualify for discharge may eliminate some tax debt..
Tax Refunds And Bankruptcy: What You Need To Know
Transcript:
Hi, Matt McArthur, bankruptcy attorney at Clear Counsel Law Group. This time of year, tax season, a very common question that I receive is how will filing bankruptcy affect the status of my tax returns and any tax refund that I may be entitled to if I file?
This is a somewhat important issue for people filing for bankruptcy because people filing for bankruptcy typically dont have a lot of disposable income and tax refunds are often treated like a nice little bonus that you can use to catch up on bills, pay for the bankruptcy itself, or do some other needed things because its money that wasnt really being counted on thats now available to you.
The problem is, specifically if youre filing a Chapter 7 bankruptcy, is that when you file for bankruptcy anything valuable that you own is potentially part of the bankruptcy estate and even the right to receive a refund can be considered a valuable asset.
In other words, if you filed your bankruptcy in January and you filed your tax return in February and youre entitled to receive a certain amount of money as part of your tax refund, then the bankruptcy case that was filed in January is going to possibly include part of that refund as property in the bankruptcy estate.
What does that mean?
That means if its property in the bankruptcy estate the court has the power to take that money, make it available to your creditors and make distributions to your creditors.
The Income Credit Exemption
The Wildcard Exemption
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Tax Refunds And Chapter 13 Bankruptcy
The Chapter 13 bankruptcy features the creation of a payment plan thats based on your disposable income. The aim here is to cover a portion of your debt. A Chapter 13 payment plan is valid for a period ranging from three to five years, after which remaining debt will be discharged.
To address the tax refunds question, you will have to learn whether the sum is included in your disposable income calculation.
Disposable income is a term that refers to the amount left after you pay all of your monthly necessary expenditures .
If you do not include the tax refunds in the payment of essentials, the bankruptcy trustee will count the sum towards your disposable income. Hence, the payments you will have to make under the Chapter 13 plan will be higher than in the instance of having no tax refunds or using the money to cover essential expenditure.
Thus, the simplest way to exclude a tax refund from the disposable income calculation is to show that its needed to make necessary payments. Usually, however, people find it very difficult to justify their desire to keep the sum.
Because a Chapter 13 payment plan lasts for several years, it will affect you on an annual basis.
You have the right to file a plan modification every single year. In this modification request, you can petition the court to exclude the tax refund from the disposable income calculation. A valid reason will have to be presented for the petition to be considered in court.
Does Bankruptcy Affect Your Tax Refund In Arizona
While we are not sure what it says about the state of savings in this country, we know that one of the most anticipated times of the year for many Americans is the time their tax returns come back.
We are in a situation in the US where not many families are able to put much to the side and are living paycheck-to-paycheck. Getting that tax return can mean a little safety nest gets built in and maybe they can take their kids on a little vacation. There is nothing wrong with that.
However, for those going through bankruptcy proceedings, they could lose enormous amounts of their tax returns if they live in Arizona. Today, we want to discuss this as well as some other bankruptcy basics. Please seek assistance from an Arizona bankruptcy attorney to go over all of your financial options.
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When The Tax Refund Hits While Youre In Bankruptcy
Ideally, youll have very little tax refund left over by the time youve filed bankruptcy, and will avoid the plight of Mr. Ellman, below.
In Re Ellman involved a public school teacher in Baltimore, Maryland, who filed for chapter 7 bankruptcy and thereafter received a $15,827 tax refund. The case trustee filed a motion for turnover and the U.S. trustee appeared at the hearing in support of the trustees motion. The debtor argued that he relied on his tax refund for living expenses for the upcoming year and that his refund should be excluded from the bankruptcy estate as future wages.
Citing a long line of cases that include tax refunds as part of the bankruptcy estate, the court found the debtors argument unpersuasive and ordered that he turn over the funds minus approximately $10,000 he had available in unused exemptions. In total, Mr. Ellman was ordered to turn over $4,615 of his tax refund. To support its ruling, the court in In Re Ellman recited an uncontroversial rule of bankruptcy law that applies to tax refunds:
Income tax refunds are property of a debtors bankruptcy estate to the extent they are derived from withholdings from the pre-petition earnings of the debtor.
To put the courts words in plain English, tax refunds received for wages earned prior to filing bankruptcy are considered property of the bankruptcy estate and are subject to liquidation if no exemptions are available.
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Current Returns Must Be Filed First
Many individuals hope to file for bankruptcy first, then reap the benefits of a hefty tax refund after bankruptcy, but this is not possible. In order to file for bankruptcy in the first place, the law requires individuals to have already filed their current tax returns. So for example, an individual filing for bankruptcy in summer 2013 would need to have already filed 2012 tax returns.
Those filing for bankruptcy must file tax returns for the current year so the Internal Revenue Service can assess any back taxes owed and collect them first. Whats more, the return is used to gauge the individuals financial situation, and creditors have a right to such information as well.
Individuals who have not filed their current tax returns before submitting a bankruptcy petition can expect to have the request denied.
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Can I Keep My Tax Return
Now that you have a better understanding of how Chapter 7 bankruptcy works, lets return to the question of tax returns and how they are impacted by filing for bankruptcy. As mentioned earlier, timing is everything when it comes to determining the status of your refund. Basically, there are three conditions related to the timing of tax returns. Lets review them now.
The Inside Story On Chapter 7 Bankruptcy
In general, when you file for chapter 7 bankruptcy, all of your assets become part of what is called a bankruptcy estate. This is controlled by an administrative party known as the trustee. The job of this person is to gather information about your case, hold hearings regarding your case and debts, and help the creditors you are indebted to in collecting on those debts. This may involve the selling of property or other non-exempt assets you own, as well as the seizure of any money you possess.
A tax refund is treated as cash or any other monetary asset when you file for chapter seven bankruptcy. The amount of money you have on hand from this refund will go toward repayment of your bills. Any money you receive after filing for bankruptcy is yours to keep. Unfortunately, tax returns fall into a strange category of their own when it comes to qualifying as preexisting funds or newly-earned money although you may receive your refund after filing for bankruptcy, the process which rendered the refund may have taken place before the filing, thus making this money eligible for seizure by the trustee of your bankruptcy.
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Eliminating Tax Debts In Bankruptcy
The filing of a bankruptcy, whether chapter 7 or chapter 13 bankruptcy, provides powerful help via two steps: the automatic stay that goes into effect when your case is filed, followed by the discharge injunction that permanently prevents creditors from attempting to enforce or collect a debt against a debtor. For many people, the financial fresh start that comes with filing for bankruptcy is life-changing. This is doubly powerful when it comes to tax debt, since the power of the IRS is far reaching, and tax debts may impact your ability to receive any tax return refunds.
How Does My Tax Refund Affect My Bankruptcy Case
If you plan on filing for bankruptcy to get rid of overwhelming debt but received a tax refund this year, you might be wondering how it will affect you. In some cases, individuals filing for Chapter 7 or 13 bankruptcy can protect the tax refunds they received. Our Los Angeles bankruptcy attorneys explain how your bankruptcy may be affected by your tax refund.
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Tax Refunds In Chapter 13
If you are filing a Chapter 13 bankruptcy, you will need to disclose your tax refunds each year that you are in the Chapter 13. If your tax refunds are the result of an earned income credit or child tax credit, they are exempt in bankruptcy and you can keep them. Generally, you can also keep the first $1,000 of a tax refund each year. If your tax refund exceeds $1,000, your Charlotte bankruptcy attorney will disclose the refund to the Chapter 13 trustee. This is a good time to also tell the trustee if you have household expenses which you have been putting off. You can propose to keep your tax refund to take care of those household expenses, provided they are not luxurious.
If you are considering filing bankruptcy, its important that you speak with a Charlotte bankruptcy attorney. The call is free and you will come away with a much better understanding of your options. You can reach us at 704.749.7747 or click to request a FREE CASE EVALUATION, and we will be in touch shortly.
Bankruptcy And Future Tax Returns
Whether future returns and refunds are affected depends on the type of bankruptcy filed. If an individual filed for Chapter 13 bankruptcy, the repayment plan may demand that for the first few years following the filing all or a portion of the tax refunds after bankruptcy be turned over and used to pay off debts.
With Chapter 7 bankruptcy, however, only tax refunds for income earned before filing are affected. The time at which the individual files for bankruptcy could result in a portion or all the refunds being seized. If, for example, the individual files for bankruptcy halfway through the year, the trustee can seize just half of that years tax refund, and the rest will go to the individual. If the individual files after the first quarter, a quarter of the refund may be seized and the rest refunded to the individual. All future refunds go directly to the individual, as with any other return.
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Tax Refund Assets In Bankruptcy
A tax refund is an asset in both Chapter 7 and Chapter 13 bankruptcy. It doesn’t matter whether you’ve already received the return or expect to receive it later in the year. If you still have it in your bank account, if it’s being processed, or if you’ll get it once you file, it’s an asset. You can expect the appointed bankruptcy trustee to ask you whether you’ve received or expect to receive a return.
As with all assets, when you file for bankruptcy, you can keep your return if you can protect it with a bankruptcy exemption. Each state decides the type and amount of the property you can exempt, and so protections vary widely. As a rule, a tax refund isn’t always easy to protect. Most states don’t have a specific tax refund exemption.
However, you might have a wildcard exemption available to you. The wildcard exemption protects any asset of your choice. Also, your state might allow you to choose between the state and federal exemption systems. The federal wildcard exemption is usually larger than that of the state. Find out the current amount of the federal wildcard exemption.
Tax Refunds & Bankruptcy
A tax refund is considered an asset in both Chapter 7 and Chapter 13 bankruptcy whether you expect to receive it later in the year or youve already received it. You will be able to keep your tax refund if you can protect it with a bankruptcy exemption. An experienced bankruptcy attorney can help you determine if your tax refund will qualify as a California exemption.
Whether you get to keep your tax refund will depend on when you earned it:
- Tax year before bankruptcy: Tax refunds go to the estate. It’s treated like cash or money in a bank account.
- Tax year you filed your bankruptcy: Tax refunds received before you filed for bankruptcy go to your estate, but tax refunds received after the filing date goes towards your debt
- Tax year after bankruptcy: You keep the full refund
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Can I Keep My Tax Refund
It depends on your circumstances. You must inform your trustee when you receive your tax refund. You also need to provide a copy of your ATO Notice of Assessment. It’s important to not spend your tax refund until your trustee makes an assessment and informs you if they have a claim in the refund. Your trustee calculates the following and notifies you of the outcome:
- Refunds for income you earn before you enter bankruptcy are assets your trustee can claim.
- Refunds for income you earn after you enter bankruptcy form part of your assessable income for compulsory payments. If your assessable income exceeds a set amount you may need to make compulsory payments. For more information about compulsory payments during bankruptcy see Income and employment.
You still need to lodge your tax returns as your obligations to the ATO remain during bankruptcy.
Are You Getting A Refund
Refunds that are issued as a result of returns for years prior to the year of bankruptcy are considered to be the property of the estate in bankruptcy. As a result, these refunds will be sent to the trustee. Any refunds issued in relation to returns for years subsequent to the year of bankruptcy will be sent to you, unless the trustee has obtained a court order.
For the year of bankruptcy, any issued refund related to the pre-bankruptcy return will be sent to the trustee. Issued refunds related to the post-bankruptcy return will also be sent to the trustee if your bankruptcy assignment date is July 7, 2008, or later. Post-bankruptcy refunds that are issued for bankruptcies with an assignment date prior to that will be sent to you, unless the trustee has obtained a court order or has provided us with an Authorization and Direction letter.
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Can My Creditors Still Repossess My Assets
Secured creditors retain their rights under their contract, even after Bankruptcy or Proposal completion. If you fail to meet the contractual obligations, the creditor can repossess the collateral . In some provinces, the secured creditors can still collect from you for the deficiency, even after repossession. Ask your Trustee if this applies to you.
Your Tax Refund During Chapter 13 Bankruptcy
Since a Chapter 13 bankruptcy works differently than a Chapter 7, your tax refund may be handled differently as well. It may need to go toward your debt payments or, if your payments are going well, then you may be able to keep it.
During a Chapter 13 bankruptcy, your trustee develops a plan for how you will pay all or a portion of your debt. You will be on a payment plan, requiring you to pay a certain amount toward the debt each month for years. This plan is based on how much you earn, how much of these wages must go to essential costs, and how much disposable income can be paid toward your debts. This plan will need to take into account your tax refund.
In many cases, the plan will call for the refund to be turned over to the trustee and used toward your debt. This is common when you do not have much disposable income going toward paying your debts. In this case, putting your refund toward the plan can be difficult to swallow, yet in your best interests. In other situations, the trustee reviews the tax refund each year and determines whether it should affect your current payment plan. If you have met all of your payments and can continue to do so without the help of the refund, then the trustee may let you keep it.
How your annual tax refund is handled during a Chapter 13 bankruptcy has a great deal to do with your trustee. You should speak with your trustee to determine what they will consider with your refund.
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