It’s important to minimize your income tax refunds, whether you’re getting ready to file a Chapter 7 case or you’re already in a Chapter 13.

In Chapter 7 bankruptcy, tax refunds are probably the most likely asset to be taken by the trustee.  This presents a couple of real problems, one practical, one legal:

- You probably rely on your annual tax refunds for annual costs or just to get current on your bills.  If the bankruptcy trustee takes the refund, this will clearly not work!

- The legal difficulty is that if the trustee takes and distributes ANY of your assets to creditors, you now have an “asset” case, as opposed to a “no-asset” case.  Without going into detail here, you really, really want a “no-asset” case.

In many states, the Chapter 13 trustee will expect you to pay all or part of your annual refunds into your plan (in Utah, annual refunds over $1,000.00 are paid to the trustee).

It is quite common these days for a large portion of your bankruptcy tax refund to be attributable to the Earned Income Credit.  While you can control how much of your wages are withheld, and thereby directly control the amount of your refunds, it’s not widely known that you can do the same, more or less, with the EIC.

Right now, yes, RIGHT NOW (or tomorrow or Monday), get a W-5 form from your employer and complete it ASAP.  The W-5 (assuming you meet all the requirements) allows you to immediately start receiving a portion of the annual EIC IN EACH PAYCHECK.  You’ll receive your pay PLUS a portion of what would otherwise be your income tax refund next spring.

Your refunds next year will be smaller, but you’ll be able to have and spend the money now rather than giving it to the bankruptcy trustee later.  Your bankruptcy attorney will be impressed and will thank you!

Mark Emmett, Salt Lake City bankruptcy attorney

SEE ALSO:

Tax Refunds and Chapter 13

One of the benefits of the hard fought health care reform is a provision that becomes effective for small businesses this year.

I ran across this informative question and answer type article in the July 20, 2010 San Diego Union-Tribune newspaper.

It was of particular interest to me, since my business likely qualifies for this tax credit. My office is comprised of 3 locations, with 4 attorneys and 6 support staff. According to this article, the tax credit will apply to business of 25 employees or less, along with other requirements. We happily provide Kaiser-Permanente health HMO to our employees, and it appears that our firm will enjoy a 35% deduction of our health care premiums by way of a tax credit this year, and each year, until 2014, when the tax credit is increased. This will certainly help our office in lightening our tax burden, by providing us additional tax incentive to maintain our health care benefit to our valued employees. To be sure, I will be consulting with my tax professional (as any other small business owner should do) to make sure I comply with applicable tax codes before claiming this tax credit. Hopefully this tax credit will be beneficial to the small business community that have seen their health insurance premiums rise 113 percent over nine years, a growth rate of nearly 9% annually. (Per smallbusinessmajority.org )

Other, more in depth questions and answers, along with a tax credit calculator can be found at the following link:

http://smallbusinessmajority.org/hc-reform-faq/index.php#3d

John C. Colwell, Attorney at Law

Debt Relief Legal Clinic

San Diego, CA

877-663-3287

Member, Board of Directors, NACBA

National Association of Consumer Bankruptcy Attorneys (NACBA)

Debt Relief Legal Clinic Facebook Fan Page

When filing for Chapter 7 bankruptcy protection, taxes can be discharged under the following circumstances: (1) the taxes are limited to taxes on income. Taxes levied for fraud, payroll taxes or sales taxes do not qualify as dischargeable; (2) the tax debt must be at least three years old at the time of filing the bankruptcy petition (11 U.S.C. § 507(a)(8)(A)(i)); (3) you must have filed a tax return for the debt at least two years prior to the filing the petition (See 11 U.S.C. § 523(a)(1)(B)); (4) you must have received notice of the tax assessment from the IRS at least 240 days prior to filing the bankruptcy petition (11 U.S.C. § 507(a)(8)(A)(ii)); and (5) the taxes cannot be subject to a tax lien. A chapter 7 discharge of back taxes eliminates a debtor’s personal obligation to a debt, however, if the IRS recorded a tax lien on real or personal property prior to the date the petition was filed, the lien remains on the property. As with any legally obtained lien, the tax lien will need to be paid before the asset can be sold.

Whether or not taxes can be discharged is a complicated area of the bankruptcy law as certain events will toll the possible discharge of a tax such as prior bankruptcy filings, filing extensions, tax litigation and offers to compromise. If taxes are a reason you are considering filing for bankruptcy protection, you should consult a knowledgeable attorney for assistance before proceeding.

- Richard V. Stokan, Jr.

In order to comply with the new rule, the Eastern District of Michigan (which covers Detroit, Bay City, and Flint) issued a notice on March 12, 2010 (available here) stating that, in each case where an order confirming the Chapter 13 plan has not yet been entered and in which the debtor’s plan provides for the payment of tax refunds to the trustee, the debtor shall sign, as requested by the trustee, (1) any appropriate IRS forms that authorize the IRS to forward the debtor’s tax refunds directly to the trustee, whether by check or direct deposit, and, (2) any appropriate form that will authorize the trustee to endorse, negotiate and deposit the debtor’s tax refund check for the debtor’s Chapter 13 account.  In cases in which the meeting of creditors has not been held, the debtor shall sign these forms at the meeting of creditors.  In cases in which the meeting of creditors has been concluded, the debtor shall sign the forms at the confirmation hearing or as a condition of confirmation, as directed by the judge.

The notice applies to Chapter 13 cases in which the meeting of creditors or the confirmation hearing is on or after Friday, March 26, 2010.

-Drew Broaddus

Serena V.

Brief description of your legal issue:
I am in serious debt, besides my mortgage I owe roughly 20+ thousand in credit card debt.I owe the IRS
and have been trying to make payments as best as possible. I need help!

Generally, a creditor is required to issue IRS Form 1099-C to a debtor for any debts forgiven greater than $600.  What does this mean in bankruptcy? Settling a debt before filing for bankruptcy potentially transmutates a dischargeable unsecured debt into a non-dischargeable tax debt. Credit card debt is generally unsecured and is dischargeable in bankruptcy. However, forgiven debt becomes income which is subject to income taxes, and tax debts less than 3-years old are generally not dischargeable in bankruptcy.

Example: You owe American Express $20,000 and you settle the debt for $5,000. American Express issues a 1099-C to you for $15,000 which you need to declare as income when you file your tax return. If you are in a 20% tax bracket you may incur a $3,000 tax liability that is non-dischargeable in bankruptcy.

Steven R. Striffler

Law Office of Steven R. Striffler

21 McGrath Highway, Suite 301

Quincy, MA 02169

Admitted in Massachusetts and Rhode Island

As I have discussed before on this site, bankruptcy court websites can be excellent sources of information for bankruptcy attorneys.  This seminar is just one of many ways that bankruptcy attorneys can enhance their understanding of these issues.  The Eastern District of Michigan has recently promoted similar seminars related to tax issues in bankruptcy and other issues.

-Drew Broaddus

The U.S. Bankruptcy Court for the Eastern District of Michigan (which covers Detroit, Bay City, and Flint) is encouraging bankruptcy attorneys to enhance their understanding of bankruptcy related tax issues.  Through its website, the Eastern District is providing Detroit bankruptcy attorneys with registration information for a January 28, 2010 “Dinner Meeting.”  Topics to be discussed at this meeting include an update regarding “IRS vs. Chapter 13 Trustees,” issues pertaining to tax refunds subject to garnishment, automatic stay issues, the novation theory, avoiding liens, and more.  The Eastern District’s announcement can be found here.

This seminar is just one of many ways that bankruptcy attorneys can enhance their understanding of bankruptcy related tax issues.  However, the fact that the Eastern District of Michigan chose to promote this seminar in particular is interesting, as it may reflect a general sense that such issues are not adequately understood by Detroit bankruptcy attorneys as a whole. If you are considering bankruptcy, it is important to find a bankruptcy attorney in your area who has an understanding of these issues.

-Drew Broaddus

John Colwell wrote an excellent post this week detailing the financial toll that paying the minimum monthly on credit cards can take on your wallet over the long haul. The bottom line is this: would you be able to afford your mortgage or car loan if your lender was charging 18-35% interest? Could be a poor example as many Americans are having difficulty meeting all of their debt obligations at “reasonable” interest rates, but you get the idea…….paying back principal is one thing, but paying only interest for years and years and getting nowhere makes no sense.

How can the credit card companies expect you to survive while charging clearly usurious rates of interest? They don’t. Any company that charges usurious interest rates doesn’t expect to be paid back, they expect to keep you in a revolving cycle of debt. That’s how they make their money. As the interest rates charged by credit card companies increase, as the US Airways of the world and every department store known to man continue peddling high interest credit cards to their customers, as unemployment continues to skyrocket…..credit card problems will continue. As a bankruptcy attorney, I routinely meet with clients who simply cannot afford their credit card payments. They feel stressed and stuck. What are your options for getting out of credit card debt?

At a basic level there are three:

1. Pay off the debt…….yes I’m serious. If you have liquid assets available to cash in, it may be wise to pay off the entire balance and move on. As the previous paragraph will indicate, I realize this is not possible for most readers. Especially in a recession, most Americans can barely afford the minimum payments on credit cards.

2. Work with a debt settlement or credit counseling company. Be Careful. I would highly recommend meeting with a reputable bankruptcy attorney before taking this step. In my opinion, debt settlement may be a solution for a consumer who is for some reason unable to file for bankruptcy. Debt settlement companies have a reputation for aggressive, sometimes misleading advertising. Results vary widely. Keep in mind that in most cases, you will pay a debt settlement company on a monthly basis while they amass a “war chest” of funds to pay a one time payment to your credit card lender, theoretically in full satisfaction of the debt. While this war chest is being accumulated, your debt remains outstanding, interest may continue to accrue and your credit continues to deteriorate. Likely there will be no refund of their fee if settlement is unsuccessful.

Further, the debt settlement will only happen if your lender agrees to accept less than 100% of the debt which they are not obligated to do. There is no magic formula that debt settlement companies employ. They offer your lender something and bank on the fact that because you are in serious default, the lender is expecting to get nothing. Something is better than nothing, so the lender may agree. If you have numerous lenders, debt settlement becomes even more difficult. Three out of four credit card companies may agree to a reduced principal balance while the fourth company sues you for non-payment and garnishes your wages.

If a lender does agree to a debt settlement and agrees to forgive your credit card debt, be aware there are significant tax consequences. Credit counseling and ebt consolidation may be able to help lower interest rates, however, you will still be responsible for a payment each month.

3. Bankruptcy. Filing for bankruptcy will eliminate unsecured debt such as credit card debt, old taxes and medical bills. For families that are in severe financial distress, this option provides an opportunity to free up major cash flow. Imagine how much money you could save on a monthly basis if you eliminated ALL credit card balances. Money that is thrown away paying credit card companies interest can be diverted to the mortgage, groceries or used as disposable income. Your credit card lenders will not have a choice as to how much you will pay to “settle” the debt, instead the balances will go to zero. You will owe nothing. Once the bankruptcy case is filed, the credit card companies will be prohibited from calling you or contacting you for any reason. Any previous court judgments will be wiped out……completely. In addition, contrary to common misconception, there is a good chance that you will be able to keep all of your property through the bankruptcy process. Most clients that I represent are able to exempt all of their assets from creditors. Fact is this: bankruptcy has helped millions of Americans get out of credit card debt for good……..if you have questions consult a local bankruptcy attorney.

John O’Connor

In order to be avoidable, the lien must be a judicial lien such as a judgment or garnishment or a non possessory security interest in an asset. Tax liens can be avoided in a Chapter 13 bankruptcy under certain circumstances, however, they are not avoidable under a Chapter 7 filing. If a debtor has a lien on his or her property, it is important to determine whether the lien can be avoided. Regardless of whether the debtor is filing for bankruptcy under Chapter 7 or Chapter 13, certain liens, such as liens that secure domestic support obligations are not avoidable. 11 USC 522(f)(1)(A). A bankruptcy attorney will be able to determine whether the lien is avoidable.

Richard V. Stokan, Jr.