What happens if I do not give my bankruptcy trustee a copy of my next year’s tax return?

Short answer: revocation of discharge (this is bad).

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Nearly every bankruptcy trustee asks you to send to him/her a copy of your tax return. If you do not send the trustee a copy of your tax return then the trustee can, and usually will, motion the Court to revoke the discharge of your debts. You do not want this to happen.

Trustees have to put on a tough face because debtors are always forgetting to hand over their tax refunds. As I mentioned two weeks ago, collecting tax refunds is low hanging fruit for trustees.

Just last week one of the trustees here in Utah implemented a new policy. At the 341 Meeting of Creditors the trustee will schedule a 2004 Examination with you for next year sometime in January to April. This is an extended Meeting of Creditors but the trustee is given great powers to demand that you hand over documents and information. The trustee said that if you get a copy of your tax return before the date you decided on then you will not have to attend the 2004 Examination.

If you filed for chapter 7 bankruptcy then please, PLEASE talk to your bankruptcy attorney before you spend your tax refund.

Where does my discharged debt go when I file for bankruptcy? Do my creditors get paid for my debts?

Answer: your debt is gone; no one pays your creditors.

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It’s a good question and one that I had when I was first introduced to bankruptcy law. This is a question that many of my clients ask me. Often they ask “who pays my creditors after bankruptcy?” It makes sense that people would think that someone, whether it’s the government or the trustee, will pay the creditors the debt that is owed to them.

Unfortunately for creditors (but fortunately for debtors) if the case is a “no-asset” chapter 7 (where the trustee does not take and sell any of your property), that debt is money they will never see again. Legally your debts are discharged at the end of a bankruptcy and the creditor cannot try to collect that debt ever again.

If there are assets that are sold in the bankruptcy case then the trustee will return to creditors a pro rata share of whatever is collected. This amount is always less than the original amount that is owed.

In many cases the debt being discharged is owed to a company, often times a credit card company or a hospital. These companies build into their business models the reality that they will not collect some debts. And despite having hundreds of thousands of dollars owed to credit card companies being discharged every day, everyone still gets credit card offers from credit card companies in the mail.

I don’t want to diminish the pain that many creditors feel, particularly individuals. While these big companies are able to absorb these losses, individuals feel the hurt a lot more when a debt is discharged. Not infrequently, these creditors had sympathy for someone and lent them money to help them overcome a problem.

Lesson to creditors: be careful who you lend to. If you cannot afford to lose that money, then don’t lend it. There is a good chance if a debtor files a bankruptcy you are not going to see that money again.

Can I keep my tax refund if I file for chapter 7 bankruptcy? Will the trustee take my tax refund if I file for chapter 7 bankruptcy?

Short answer . . . it depends. (skip to the end for a summary on when to file)

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I never counsel anyone to represent themselves pro se in a bankruptcy. The reason is this: it is very easy to lose more money representing yourself than it would be to hire a bankruptcy attorney.

The trustee assigned to your case has one goal which is to collect and liquidate as much non-exempt property as possible to return as much funds as possible to the creditors. The trustee also has an incentive to go after assets because he keeps a small portion of what he collects.

In almost every case the trustee can easily find some property that is not exempt. Typically those who file bankruptcy have less than $100 in their bank account. Why? Because money in a bank account is not exempt and the trustee could take all of this money if he chooses to. That being said, most of the time the trustee does not go after this money because it is not worth his time to file a motion to sell or liquidate property that will earn him a few dollars. Trustees call these types of assets “administratively burdensome” and do not pursue this property.

So what does all of this have to do with taxes? The trustee likes to collect more money without having to spend much time. Because of this all trustees goes after the low hanging fruit: tax refunds.

Bankruptcy attorneys know that the tax refund is not exempt and so they do not fight these types of motions. Bankruptcy attorneys will fight the trustee on how exemptions are applied. But for tax returns, there is no fighting. It is relatively easy for the trustee to collect a tax refund.

For many people who file bankruptcy, their tax refund is the single biggest windfall they will receive that year. The trustee knows this and will almost always go after your tax refund.

So how do you keep the trustee from collecting your tax refund? That depends on which month of the year you file. If you are one of the first people to file your tax return and get your tax refund in February then you can spend all of your tax refund and then file for bankruptcy. As long as you spent this money on non-exempt property (typically food, gas, necessities) then there is nothing the trustee can collect. If, however, you filed bankruptcy before you received and spent your tax refund then the trustee will require that you turn over the entire amount.

After about the month of May, most people have received their tax refund and the trustees stop pursuing the tax refund for that year. Depending on the trustee, around the end of June to the first part of August the trustee will start directing that you handover a pro rata share of your next year’s tax refund. Let me give you an example of how this works.

Let’s say you file a bankruptcy on July 1, 2015 and your 2015 tax refund will be $2,000. The trustee will ask that you handover your 2015 tax refund that you will get in early 2016. The trustee will then take a share that is equal to six months of the twelve total months of the year 2015, which will be 50% of the $2,000 which is $1,000. The reason is that all of the tax refund you are building up to the date of filing for bankruptcy is part of the bankruptcy estate. All tax refunds accruing after the date of filing is not part of the bankruptcy estate.

So let’s use another example. If you file on August 1, 2015 and your tax refund will be $2,000. This time the trustee will keep seven months of the total twelve months of 2015, which is $1,166.66.

If you file on September 1, 2015 and your tax refund will be $2,000 then the trustee will keep eight months of the total twelve months of 2015 (which is two thirds). That means the trustee will keep $1,333.33.

The later in the year you file, the greater the amount the trustee will be able to keep of your tax refund. Because of this, many of the people who file later in the year do not have a very sizeable tax refund if they have one at all. This also means that there are more bankruptcies filed in the months of February, March, and April. Debtors can receive their refund, spend it, and then file for bankruptcy without losing any of their tax refund.

Here are my basic guidelines for each month of the year.

January to April. Make sure you receive and spend your tax refund before you file for bankruptcy. The trustee cannot collect a refund if you have spent your refund (on exempt property).

May to June. Again, make sure you receive and spend your tax refund before you file for bankruptcy. Most trustees don’t start asking for the following years tax refunds until the end of June.

July to December. The trustee will take a proportional share of your tax refund. If your tax refund is large and you absolutely must file a bankruptcy then it is best to file sooner rather than later. If you aren’t getting much of a tax refund, or none at all, then it won’t matter when you file. If you are getting a large tax refund then it might, depending on your particular situation, make sense to wait until the next year to file for bankruptcy.

I filed a bankruptcy and received a discharge and one of my creditors sent me a 1099-C. Do I need to report my discharged debts as taxable income on my taxes?

Probably not.

I am not an accountant or a CPA or a tax attorney. However, my understanding is that you do not need to report your discharged debts as taxable income.

Often times a creditor who decides to write off some of the debt you owe to them will send you a 1099-C to report as income. While you might have to include this amount as taxable income in certain circumstances, the United States code (26 U.S. Code § 108 – Income from discharge of indebtedness) states that you do not need to include discharged debts as taxable income.

(a) Exclusion from gross income

(1) In general
Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if—

(A) the discharge occurs in a title 11 case, [OR]
(B) the discharge occurs when the taxpayer is insolvent.

A title 11 case refers to the US Code section that deals with bankruptcy so this does not mean a chapter 11 bankruptcy. It simply refers to any chapter of bankruptcy. Furthermore, those who file bankruptcy, particularly chapter 7 bankruptcy, are presumed to be insolvent at the time of filing.

Someone at turbo tax also agrees with me.

To be safe, you should probably consult with your accountant.

Bankruptcy Filing Fees Increasing June 1, 2014

I received an email update from Kevin R. Anderson, the chapter 13 trustee, which states that certain filing fees will be going up on June 1, 2014. The important parts state the following:

[T]he “administrative fee” charged at the filing of every Chapter 7 or Chapter 13 case increases to $75 (from $46); a new fee of $75 will be charged to divide a joint case under Chapter 7 or Chapter 13; the filing fee for an adversary proceeding increases to $350 (from $293).

Currently the total filing fee for a chapter 7 is $306 and the total filing fee for a chapter 13 is $281. It appears that administrative fee, which is part of the total fee, is increasing by $29. This means that the filing fee for a chapter 7 will increase from $306 to $335 and the filing fee for a chapter 13 will increase from $281 to $310.

What property is exempt under Utah Bankruptcy laws?

One of the most important concepts to grasp when you are considering filing for bankruptcy is understanding how the bankruptcy exemptions work. When you file for bankruptcy you do not lose all your property. Under bankruptcy law there are exemptions that prevent creditors and the trustee from taking certain property from you.

Below is a basic list of property and the value that is exempt for each item of property under the Utah Code.

Real Property
Home: $30,000 equity single filing
Home (filing jointly): $60,000 equity
2nd Property: $5,000 equity
2nd Property (filing jointly): $10,000 equity

Vehicles
Car: $3,000 equity
Cars (filing jointly): $3,000 for first car, $3,000 for second car

Retirement
Retirement Funds are generally unlimited if the contract or policy has been owned by the debtor for a continuous unexpired period of one year. These include:
(a) Life Insurance policies
(b) IRA’s
(c) 401(k)’s
(d) Pensions

Basic Necessities
(a) Provisions sufficient for 12 months actually provided for individual or family use (includes food)
(b) All wearing apparel of every individual and dependent (not including jewelry or furs)
(c) Beds and bedding for every individual or dependent

Household Items (one of each of these)
(a) Clothes washer and dryer
(b) Refrigerator
(c) Freezer
(d) Stove
(e) Microwave oven
(f) Sewing machine

Limited Household Exemptions
$1,000 aggregate of these:
(a) sofas, chairs, and related furnishings reasonably necessary for one household
(b) dining and kitchen tables and chairs reasonably necessary for one household
(c) animals, books, and musical instruments, if reasonably held for the personal use of the individual or the individual’s dependents
(d) heirlooms or other items of particular sentimental value to the individual
(e) firearms and ammunition in the amount of $250 per individual, and not more than $500 per household.

Tools of the Trade
$5,000 of these:
Professional books or tools of the individual’s trade, including motor vehicles to which no other exemption has been applied, and that are actually used by the individual in the individual’s principal business, trade, or profession.

Links
Utah Bankruptcy exemptions can be found under three sections in the Utah Code:
78B-5-503
78B-5-505
78B-5-506

Can I get a fee waiver for my chapter 7 bankruptcy?

The short answer: it depends on your monthly income and how many dependents you claim.

One of the most difficult things for people planning to file for bankruptcy is finding enough money to pay an attorney to represent them. On top of attorney’s fees, you will have to pay the court a filing fee which is currently $306. That may not seem like a lot of money to some but if you are considering filing for bankruptcy chances are you are carefully watching where every dollar goes.

Fortunately, if you are below 150% of the poverty line you may be eligible for filing fee waiver. You’ll still have to pay your attorney’s fees but at least you can shave off a few hundred dollars off the cost of your bankruptcy.

The amount is determined by the U.S. Department of Health and Human Services (DHHS). Whether you qualify depends on how many people are in your household. The more people in your household, the higher that 150% of the poverty line climbs. The number also depends on which state you live in, although DHHS uses the same numbers for the 48 contiguous and D.C. while Hawaii and Alaska get their own numbers.

At the time of this writing this table shows the maximum monthly income you may have in order to qualify for a fee waiver.

Persons in family unit Monthly Income
1 $1,458.75
2 $1,966.25
3 $2,473.75
4 $2,981.25
5 $3,488.75
6 $3,996.25
7 $4,503.75
8 $5,011.25
Each Additional Person $507.50

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