Amending Your Petition To List A Tax Refund
Tax refunds are valuable assets in your bankruptcy that must be listed on your bankruptcy forms. If you forgot to list your tax refund on your bankruptcy forms and your 341 meeting has not yet taken place, you must file an amendment to your bankruptcy forms listing the refund, whether or not it is exempt.
If your 341 meeting has already occurred and the trustee has determined your case is a no-asset case chances are an amendment adding your tax refund is not necessary because it would have otherwise been protected by an exemption. You can check your state exemptions to confirm. In some cases a trustee may indicate that they will check back after your tax return has been filed to to see if you receive a tax refund.
If you receive a notice asking your creditors to file a proof of claim or your trustee states your tax refund will be seized, you can file an amendment to protect what you can using available exemptions.
The amount that can be protected by an exemption may depend on whether other assets are being protected with the wildcard exemption and/or whether your state has specific exemptions for one or more tax credits.
If youâre an Upsolve user and need instructions on how to use our free web app to prepare your amendment, please visit help.upsolve.org and use the Submit a Request feature in the top right corner to send us a message.
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How Long Does Chapter 7 Bankruptcy Last
In a Chapter 7 liquidation as opposed to a reorganizing your debts that with either a Chapter 11 Bankruptcy or a Chapter 13 Bankruptcy, your assets which are deemed not exempt pursuant to various Florida statutes and the federal bankruptcy code are liquidated by the appointed Chapter 7 trustee, and the proceeds from the sale are disbursed to your creditors. A Chapter 7 Bankruptcy can be filed for individuals or businesses, but for individuals to qualify, they must pass the means test. If your income exceeds the medium income allowable for your household and your Chapter 7 may be considered abuse under bankruptcy section 707, you may convert your case to a case under Chapter 11 or Chapter 13.
A Chapter 7 bankruptcy filing is relatively quick instead of the more complex Chapter 11 bankruptcy or Chapter 13 bankruptcy, and your debts are commonly wiped out in three to six months. The timeline to acquire your discharge hinges on a mixture of factors, such as how congested the bankruptcy courts are. However, if creditors oppose your bankruptcy filing or possess non-exempt assets, your discharge may take longer to receive.
How Does Filing For Chapter 7 Bankruptcy Affect My Tax Return
Aside from the questionIf I file for Chapter 7 bankruptcy, and then win a lottery, can I keep the money?the second most asked question is: Can I keep my tax refund under the same circumstance? Its a good and valid, question and one that depends upon certain conditions pertaining to the timing of the actual filing of bankruptcy.
Surprisingly, it is both permissible and legal to factor the question of the status of your tax refund into consideration when filing for bankruptcy. Well go over the various conditions related to timing, however, it might be a good idea to first gain an understanding of how the Chapter 7 bankruptcy process works.
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Chapter 7 Bankruptcy And Your Tax Refundwhen A Person Files For Chapter 7 Bankruptcy Generally A Tax Refund Becomes Part Of The Persons Bankruptcy Estate Along With All The Persons Assets It Is Highly Likely You Will Be Questioned About Your Tax Refund By The Trustee During Your Creditors Meeting The Tax Refund Can Be Used To Pay Unsecured Creditors
Because you can keep any assets you receive after filing bankruptcy, a tax refund can be complicated. Often times, people apply for a tax refund before filing for bankruptcy but do not receive it until after they have filed the bankruptcy petition. The trustee will determine how to treat the tax return depending on when the income was earned that determined the tax refund.
Tax YearTax Refund
IF the tax refund was or should have been received the year before bankruptcyIf the tax refund was not spent, it will be considered part of the bankruptcy estate, like other cash held by the debtor. The trustee typically will consider this tax refund the debtors money, because it is normally viewed as money unnecessarily paid to the federal or state government. This means it is treated just like other cash or money kept in the debtors bank account and used to pay unsecured creditors.
IF the tax refund was or should have been received the year of bankruptcyThe tax refund is prorated based on money earned before and after filing for bankruptcy. This means that the part of the refund attributed to income earned before the bankruptcy filing date will be considered as part of the bankruptcy estate. In other words, it will be considered as funds the trustee can use to pay unsecured creditors, just like cash or money in a bank account. However, the part of the refund attributed to income earned after the bankruptcy filing date can be kept by the debtor .
Approved expenses include:
Can You Discharge Taxes In Bankruptcy
It depends but is possible for individual taxpayers. LLCs, corporations, and partnerships usually cannot discharge taxes in a Chapter 7 bankruptcy.
With Chapter 7, an individual taxpayer can get taxes discharged if they meet specific criteria. With Chapter 13 bankruptcy, you usually end up paying all your taxes in your repayment plan, but you may be able to get a small percentage of non-priority taxes owed discharged. The rules on taxes owed also vary for Chapter 11 and Chapter 12.
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Filing Taxes After Filing For Bankruptcy
Filing an income tax return after filing for bankruptcy does not have to be a problem, as long as you know what to watch out for, including when and how to file.
For information on the third coronavirus relief package, please visit our American Rescue Plan: What Does it Mean for You and a Third Stimulus Check blog post.
Is there life after bankruptcy? Absolutely, and it includes taxes. Filing an income tax return after filing for bankruptcy does not have to be a problem, as long as you know what to watch out for, including when and how to file.
People that file bankruptcy have to make sure that there are a few things taken care of when it comes to filing their taxes, said Joshua S. Barger, vice president of tax services at Foundation Financial Group in Jacksonville, Florida.
According to IRS Publication 908, Bankruptcy Tax Guide, the Bankruptcy Code requires a debtor to file an individual tax return, or request an extension. If this does not happen, the bankruptcy case can be converted or dismissed. In addition, the bankruptcy trustee is required to file a tax return for estates and trust, Form 1041, for the bankruptcy estate.
No matter what time of year it is, the filing deadline can seem too close for comfort — especially if you are filing or considering filing for bankruptcy. With a little planning and preparation, you will at least know what to do to minimize your stress.
– Joshua S. Barger, vice president of tax services, Foundation Financial Group
What Happens To Your Tax Refund In Bankruptcy
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In a Nutshell
When tax season comes, many individuals filing for bankruptcy expect to receive a tax refund check. So what happens to your tax refund when you file for bankruptcy?
Tax refunds often result when you pay more taxes during the year than you actually owe because too much is withheld from your paycheck each week. Tax refunds are a predictable annual source of funds for many Americans. According to Internal Revenue Service data from 2004, 77% of tax returns result in a refund check. And in 2018, the average federal tax refund was $1,865. So that raises the question – when youâre filing for Chapter 7 bankruptcy, can you keep the tax refund that youâre expecting to receive? The answer, unsurprisingly, is âit depends.â In this article, we explain how to protect your tax refund in bankruptcy asfully as possible.
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Chapter 7 Vs Chapter 13
Chapter 7 bankruptcy forces you to liquidate a great many assets to repay creditors. But the process can be concluded relatively quickly, and any wages and property you acquire after the bankruptcy filing, except inheritances, arent subject to distribution to your creditors. Typically, the entire process is completed within six months.
But Chapter 7 has disadvantages, too. Lenders who have already filed to foreclose on your home are only temporarily stalled, and other debts such as mortgage liens can be collected after the case is concluded. Cosigners on your debt are still obligated to pay.
Seeking Chapter 13 protection allows you to keep all your property. It simply extends the amount of time you have to repay what you owe after the bankruptcy court issues its ruling. It is possible to file a Chapter 13 bankruptcy after a Chapter 7 is completed, allowing you to seek a reduction in whatever debts remain from a Chapter 7 discharge.
Chapter 13 also protects your loan cosigners against collection efforts if the bankruptcy settlement obligates you to repay the debt yourself. If you need to file a second bankruptcy, Chapter 13 is only a two year waiting period versus eight years for Chapter 7.
There are disadvantages to Chapter 13 bankruptcy as well. Legal fees can be higher in Chapter 13 cases than Chapter 7 cases and your obligation to repay can last for years. In Chapter 7, the Chapter 7 discharge ends most debt obligations.
Usually You Must Turn Over Your Tax Refund To The Chapter 13 Trustee But There’s A Way You Might Be Able To Keep It
By Cara O’Neill, Attorney
If you receive a tax refund during your Chapter 13 bankruptcy, the trustee assigned to administer the case could require you to turn that money over for payment to your creditors. Fortunately, bankruptcy law allows you to modify your Chapter 13 plan to excuse payment of tax refunds in certain circumstances.
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How To Excuse A Tax Refund
The easiest way to excuse a tax refund is to show that you’ll need to use the refund to make your plan work. However, most people can’t justify a “keep the return” provision in the plan.
That doesn’t mean you can’t seek relief. If you later run into a problem during the plan, you can modify it by asking the court to excuse a particular refund because your reasonable expenses have increased. However, this won’t work if the trustee can show that the refund isn’t needed to cover expenses.
Here are the specifics for each approach.
More Notes On Taxes Chapter 13 Repayment
Chapter 13 repayment has some key advantages over IRS repayment. Initially, as mentioned, pretty much everyone qualifies for Chapter 13. Additionally, the IRS may continue to harass and threaten people during a non-bankruptcy repayment period. Furthermore, the IRS may unilaterally cancel the payment plan over something as minor as one payment which is one day late. Finally, a Georgia bankruptcy lawyer might be able to stop penalties and interests from accruing during Chapter 13 repayment. The law is a bit uncertain on this point.
As a footnote, although a Georgia bankruptcy lawyer is not an accountant, an attorney can connect former debtors with accountants and other professionals. These individuals help debtors set up effective prepayment and withholding plans which dont result in a big refund or a big tax bill.
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Estimated Proofs Of Claim
The IRS files estimated proofs of claim if you have unfiled, past due federal tax returns. Its important to have an up-to-date proof of claim for any federal taxes you owe before confirmation of your Chapter 13 plan. This ensures you dont pay any more than you need to and minimizes discharge of the tax debt issues upon completion of the Chapter 13 plan.
To help the IRS quickly amend an estimated proof of claim, promptly provide the IRS bankruptcy specialist with a copy of each late filed return for each year on the proof of claim. This helps to avoid unnecessary litigation on the proof of claim or discharge of the liability.
The specialists name and contact information are in part 3 of page 3 of the proof of claim. Otherwise, call 800-973-0424 to get the name and phone number of the specialist handling your case.
The specialist will ordinarily amend the proof of claim within 21 days. If you havent heard from the specialist within 21 days of submitting your late filed returns, please call 800-973-0424.
Why File Chapter 13 Instead Of Chapter 7
Chapter 13 may provide you with bankruptcy protection even if you make too much money to qualify for a Chapter 7 case or if you received a discharge in a prior Chapter 7 case. You get the length of the plan to pay back past due amounts owed on houses, cars, and other loans that have collateral. Chapter 13 may allow you to set new terms for the payment of a car loan that is older than 2.5 years, too.
Chapter 13 allows you to pay past-due income taxes and domestic support obligations like child support and alimony over the three- to five-year payment plan. This form of bankruptcy protects any co-signers you have, and it could help you reduce high student loan payments.
Furthermore, Chapter 13 allows you to protect property that youd have to give up in a Chapter 7 case. And, theres a chance you can roll your bankruptcy attorneys fees into your repayment plan.
Chapter 13 can be a lifesaver for individuals who are committed to making it a success. Chapter 13 cases, though, are not easy to live with. In fact, the American Bankruptcy Institute noted in a 2017 study that only 38.6% of debtors completed their Chapter 13 plan. But, knowing what to expect is one of the most important factors in setting yourself up for success.
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Frequently Asked Questions About Bankruptcy And Tax Refunds
3 minute read â¢Upsolve is a nonprofit tool that helps you file bankruptcy for free.Think TurboTax for bankruptcy. Get free education, customer support, and community. Featured in Forbes 4x and funded by institutions like Harvard University so we’ll never ask you for a credit card.Explore our free tool
In a Nutshell
It’s pretty well-known that tax debts typically can’t be discharged in bankruptcy. But what if you’re getting a refund? This article answers some of the frequently asked questions about tax refunds and bankruptcy.
Written byAttorney Andrea Wimmer.
What The Automatic Stay Doesnt Do
The Automatic Stay does not eliminate past-due child support or income taxes. But it does block aggressive collection efforts, so you can repay these obligations on your own terms. Well discuss the protected repayment period in a Chapter 13 below.
If you have filed bankruptcy within the previous six months, the Automatic Stay might have a more limited effect. A Georgia bankruptcy lawyer can usually file a motion to extend the Stay in these situations. Judges often sign these orders without requiring hearings.
Most people qualify for Chapter 13 and the Automatic Stay. There are some formal and informal qualifications.
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What Assets Are Part Of The Bankruptcy Estate In California
California is a community property state, which means that barring an agreement to the contrary, property acquired during the marriage normally belongs to both spouses no matter whose name is on the title. That means whether you file a bankruptcy jointly with your spouse or you file individually, all that community property is part of your bankruptcy estate. When you file individually in a community property state like California, a lot more property becomes part of the bankruptcy estate and subject to bankruptcy law than would be the case if you filed individually in a common law state. Your California bankruptcy lawyer can explain what property can be protected by bankruptcy exemptions.
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What Are Some Other Solutions For Tax Debt
If unpaid tax debt has you considering bankruptcy, you may want to explore other solutions first especially in light of the complex rules for bankruptcy and taxes.
These alternatives could include entering into an installment agreement with the IRS, making a deal with the IRS to delay collection efforts, or entering into an offer in compromise. An offer in compromise is an agreement between you and the IRS that allows you to pay a reduced amount.
There are pros and cons to each of these approaches. For example, youll need to pay a user fee for an installment agreement and will owe fees, interest and possible penalties. And the IRS wont always accept an offer in compromise.
Still, because these solutions address only your tax debt and dont affect other areas of your finances as much as bankruptcy does, they could be worth considering.
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