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What is Bankruptcy? How to File for Bankruptcy? Read the articles below to learn more about how bankruptcy works.
How to Protect your Tax Refund in Bankruptcy
As we enter tax season, many people are eagerly awaiting that quick infusion of cash known as the tax refund. But if you are considering filing for chapter 7 bankruptcy, you could lose it if you do not plan your case carefully.
Tax Refunds Are Assets
If you expect either a State or Federal tax refund in 2012, you must note it as an asset on your bankruptcy paperwork. If the refund is large enough, and if it cannot be protected with Federal or New York State exemptions, it can be taken away from you and made payable to your creditors. The individual who would take it is known as the Chapter 7 Trustee, who is charged with marshaling your assets, liquidating them and paying the proceeds to your creditors.
How to Protect Tax Refunds in Bankruptcy
The good news is that there are a variety of ways to avoid the loss of this asset. Through the proper use of exemption laws (and the proper timing of your case filing) you can typically keep most, if not all, of your anticipated refund. If you expect to receive your refund before you file for bankruptcy, you will need to know how to spend the money without raising the ire of the bankruptcy trustee and Court. How to go about doing that requires the advice of a skilled attorney, who will help you plan your case accordingly.
Protecting assets in bankruptcy can be a daunting task. Don’t go it alone — seek the advice of an experienced bankruptcy attorney today. — By Taran Provost on 2/3/12
How Should I Spend My Tax Refund Prior to Bankruptcy?
If you are contemplating filing for Chapter 7 bankruptcy and expect a tax refund, you need to be careful how you spend your refund money. Paying the wrong person, or buying the wrong things before your case is filed, can cause huge problems in your case.
It’s My Money. I can Spend it as I Wish . . . Right?
Not so fast. When you file for Chapter 7 Bankruptcy, all of your assets must be disclosed to the Chapter 7 Trustee, an appointee of the Department of Justice who is charged with marshaling your non-exempt property and selling it. The proceeds are then used to pay your debts. A portion of the sale proceeds goes into the trustee’s pocket for his time and trouble.
One of the assets trustees always look for during tax season is your beloved tax refund. Trustees like this asset because there is nothing to liquidate. Unlike real estate, which takes time to sell, a tax refund is quick hard cash that goes immediately to your creditors. So if you’ve decided to ruin the trustee’s payday by spending your tax refund before your case is filed, you had better have a good answer as to how you spent the money before your case is heard.
“I Rented a Party Boat for My 40th Birthday Party.”
While hiring a party boat may seem like a good idea at the time, spending your tax refund on frivolous items won’t make the trustee happy. Think about it — you are asking the Court to release you from your debts. If you choose to buy a big screen T.V. or install a new in-ground swimming pool with a heated cabana and tiki bar, the trustee could move to dismiss your case for bad faith. He or she will rightfully ask why you didn’t use the money to pay some of your bills.
And that’s when the fun starts — motions to dismiss, extra court appearances, and oh yeah . . . more legal fees. Wasn’t that tiki bar worth it?
“I Fixed My Car, Paid Some Bills, and Bought Clothes for
the Kids.”
The trustee will typically not question your use of refund money for necessary living expenses such as food, clothing, medical care and home repair. As long as you can generally account for how the money was spent, the trustee will quickly move on to the next question and you will be in the clear. Although trustees can be tough, most of them are pragmatic and understanding, and realize that filing for bankruptcy does not mean you have to deprive yourself of the life’s basic
necessities.
Don’t Repay Relatives Before Bankruptcy
One thing not to do before filing for bankruptcy is to use your refund to repay debts owed to family or business partners. It’s probably not a good idea to repay close friends either. If any such payments are made within one year of filing your case, the trustee can demand they return the money. The recaptured money would then be distributed evenly among all of your creditors.
Needless to say, getting your family, friends or business partners involved in your personal bankruptcy proceeding is a nightmare scenario that can destroy relationships. It sounds strange, but you should show your love and respect for mom and dad by not repaying them before filing bankruptcy. Once your case is filed and closed, you can voluntarily repay anyone you want, including your nearest and dearest.
Spending your tax refund wisely before filing Chapter 7 bankruptcy is a critical first step to a smooth case. Before you give in to temptation, take some time to think about the possible consequences of your spending choices. If at all in doubt, seek the advice of a qualified bankruptcy attorney in your area. — By Taran Provost on 2/14/12
Discharging Debts owed to Friends or Family
If you hope to eliminate debts owed to friends or family in your bankruptcy proceeding, don’t expect them to go away quietly.
When you file for bankruptcy protection, you are required to list all of your debts. This includes debts owed to friends, family, business associates, or any other personal acquaintance you owe money to. Unlike credit card companies and other lending institutions, less informed creditors like your ex-girlfriend or ex-boyfriend typically take your bankruptcy filing personally, and will frequently appear at your mandatory hearing and attempt to exclude the debt owed to them from being discharged. The credit card companies, by contrast, usually know it is not worth their time or money to challenge your discharge — it makes little sense to pay a lawyer several hundred dollars an hour to challenge a debtor with little to no assts.
The real danger in this scenario is that your friends and family often know details about your personal life that credit card companies don’t, and will use this information to derail your bankruptcy case. A close friend may know, for example, that you are working off the books, or have valuable assets that should have been disclosed in your bankruptcy paperwork. If this information is not disclosed, you can count on those closest to you bringing this information to the attention of the Court and bankruptcy trustee in an attempt to blow up your case.
The moral of the story? Don’t conceal assets and income. It’s far better to let your bankruptcy attorney know the whole story. In most cases, your attorney can find a way to resolve the problem legally and therefore prevent efforts to sabotage your case. As a great man once said, “Three things cannot be long hidden: the sun, the moon, and the truth”. — By Taran Provost on 10/29/12
What Happens to My Retirement Savings When I File Bankruptcy?
If you are thinking about filing for bankruptcy, but are concerned about losing your retirement savings, have no fear: your retirement savings plans are almost entirely protected in bankruptcy.
When you file for chapter 7 bankruptcy, the trade-off for eliminating your debt is that you may have to surrender some of your assets, which would then be sold off and the remaining non-exempt cash value made payable to your creditors. Certain assets, however, are shielded. Although the bankruptcy laws are designed to give debtors a fresh financial start (while providing some payment to creditors if any money is available) they are not designed to kick those who file out on to the street penniless. Hence the reason why some assets are exempt, or not made part of your bankruptcy case at all.
One such asset is a retirement savings plan under sections 401, 403, 408, 408A, 414, 457, or 501 of the Internal Revenue Code of 1986. Not long ago, the Supreme Court even declared that certain IRA accounts are exempt. The present amount exempt in an IRA account is a little over $1,000,000.00. There is no monetary limit for retirement accounts such as a 401K or 403b.
So if concerns about your retirement savings are preventing you from filing for bankruptcy, you can take some comfort in knowing that in almost every instance, your retirement savings plans belong to you, and cannot be seized and liquidated to pay your debts. — By Taran Provost on 2/8/13
