Wednesday, February 25, 2015

Can I Keep My Tax Refunds If I File Chapter 7?

Tax season is here again. Understandably, people filing or considering filing Chapter 7 are concerned about losing their tax refunds. The good news is that if done properly, the bankruptcy filing will most likely not cause the loss of a tax refund. Most debtors lose their tax refunds because they fail to properly disclose and exempt the tax refunds, which is common when attempting to file without an attorney or when hiring an inexperienced or careless bankruptcy attorney.

The Bankruptcy Estate

Upon filing a bankruptcy, all of the debtor's assets become property of the bankruptcy estate. The bankruptcy estate is administered by a person called a trustee. It is the trustee's job to liquidate assets for the benefit of the debtor's creditors. The Bankruptcy Code defines assets very broadly. Assets include things a debtor owns at the time of filing, will own in the future, or could own upon some event occurring. What is considered an asset is not always obvious to a layman, which is why it is so important to hire an experienced and thorough bankruptcy attorney.

What Tax Refunds Are Part of the Bankruptcy Estate

Tax refunds, or the right to receive tax refunds, are an asset in almost every Chapter 7 bankruptcy. Most debtors understand that tax refunds that they are holding at the time they file bankruptcy are an asset. Most debtors also understand that tax refunds that they will receive during the same calendar year they file bankruptcy are an asset. What most debtors do not realize is that a portion of the tax refunds associated with the calendar year the bankruptcy petition is filed are also an asset. In other words, if you file bankruptcy in 2014, a portion of the 2014 tax refunds which will be received in calendar year 2015 are part of the bankruptcy estate.

A debtor's marital status and how they file tax returns can also have an impact on how much of the refunds are part of the bankruptcy estate. Typically, if a married individual files bankruptcy without their spouse and the tax returns resulting in refunds were filed jointly, only 50% of the refunds are considered assets of the bankruptcy estate.

Tuesday, February 24, 2015

Will I Lose My Home If I File Chapter 7?

When evaluating the probability that an asset will be liquidated in a Chapter 7, a full review of a debtor's assets is necessary. This is especially true when looking at a debtor's home. 

Federal Homestead Exemption

Under the federal exemptions, a debtor may exempt equity in a home in the amount of $22,975 by using the 11 USC 522(d)(1) "homestead exemption." When it is a joint case (husband and wife filing together), the homestead exemption may be used by both debtors, which would allow for an exemption of $45,950.00.  

A debtor's ability to use the homestead exemption is reduced when other assets require exemption under the 11 USC 522(d)(5) "wild card" exemption.  If the wild card exemption is needed to protect assets of a debtor and the equity in those assets exceed $1,225.00, the debtor will need to borrow from the homestead exemption (up to $11,500.00 can be borrowed by each debtor). The wild card exemption is typically used for bank account funds, anticipated tax refunds, stocks or investments outside of an qualified retirement plan, or for assets that have value that exceeds its applicable statutory exemption.

Michigan Homestead Exemption

A debtor is not required to use the federal exemptions.  A debtor may elect to use the Michigan exemptions, which provide for a more generous homestead exemption. However, most debtors do not elect to use the Michigan exemptions because there is no equivalent to the federal wild card exemption. A consultation with an experienced bankruptcy attorney would be able to give you a better sense of what it means to elect state exemptions and if it is right for you.

Trustee Liquidation Analysis

The Trustee, when determining whether he/she will administer or attempt to liquidate an asset, will first try to determine what equity exists (market value less any liens).  Once the equity is determined or estimated, the Trustee will then look at the exemptions taken and see to what extent any of the equity is unprotected. A Trustee will not liquidate a home unless he/she thinks that they can sell it for enough to pay off all the valid liens, pay off the debtor for any valid exemptions, pay all necessary costs associated with a sale, and also have some type of surplus after the liens, exemptions and sale costs are satisfied. 

Another important thing to keep in mind is that unprotected equity does not automatically mean that the asset will be liquidated.  A Chapter 7 Trustee is often willing to negotiate a settlement with a debtor to avoid liquidation. This type of settlement generally means paying the Trustee funds equal to the unexempt equity or a portion of the unexempt equity. This can be accomplished by paying a lump sum or by installment payments.  

**A note of caution: when filing a Chapter 7, the Trustee will be examining the recorded deed and recorded mortgage(s) to see if there are any defects that would allow them to avoid the lien. Avoiding a lien is a fast way to create a large amount of equity and cause a debtor to lose their home.  This is one, among many, reasons that it is so important to hire an experienced and thorough bankruptcy attorney. 

The Bottom Line

Sitting down with an experienced bankruptcy attorney to discuss your assets in detail should provide you with a better sense of whether liquidation is likely for you. An attorney will also be able to discuss your alternatives for resolving your debt while avoiding loss of assets, such as Chapter 13 and debt settlement.

Visit Law Offices of Ryan F. Beach

This website is designed for general information only. The information presented at this site should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

Monday, February 23, 2015

Michigan Drivers Responsibility Fees

Michigan Drivers Responsibility Fees are routinely discharged in Chapter 7 and Chapter 13. However, there is an exception to discharge for debt that is “a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss.” 11 USC 523(a)(7). I believe the nature of these fees are monetary sanctions. In other words, they seem to be punitive in nature and not compensating for an actual pecuniary loss.

My interpretation of the Bankruptcy Code is that these fees should survive a Chapter 7 bankruptcy discharge (Section 523(a)(7) is a self-executing exception to discharge, so no adversary proceeding is needed). Section 1328 of the Bankruptcy Codes, which governs what is discharged in Chapter 13, does not include the 523(a)(7) exception to discharge. So, these fees are discharged in Chapter 13. The State is fully aware of the 523(a)(7) exception to discharge. They use it all the time for statutory fines related to overpayment of unemployment benefits. It may be that they've made a policy decision to allow these debts to be discharged/eliminated in their records when a person files Chapter 7.

The Bottom Line

Chapter 7 may work, it may not. Chapter 13 is definitely the route to go if you're not willing to take any chances in getting rid of Michigan Drivers Responsibility Fees. In all cases, a person overwhelmed with debt should consult with an experienced bankruptcy attorney. An experienced bankruptcy attorney should be able to evaluate your situation and help you decide the best way to get the relief you need.

Visit Law Offices of Ryan F. Beach

This website is designed for general information only. The information presented at this site should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

How Will My Bankruptcy Affect My Spouse?

Only one spouse filing bankruptcy is very common. A bankruptcy filing should not impact the non-filing spouse's credit; however, the filing may cause an issue with any debt that is held jointly and any unprotected or "unexempt" assets. Consulting with an experienced bankruptcy attorney will give you an idea if there are any issues. The non-filing spouse should attend the bankruptcy consultation with the filing spouse so that these potential issues can be thoroughly explored and so that they are fully aware of any issues that may exist.

Joint Debt

If there is a joint debt and only one spouse files bankruptcy, only the filing spouse's liability on the joint debt is discharged (be mindful that some debts are or can be deemed nondischargeable). In other words, the non-filing spouse will be liable for the entire joint debt after the filing spouse receives a bankruptcy discharge.

Equity in Joint Property

If there is significant equity in joint property, there is a risk of liquidation (forced sale) by the Trustee if the filing spouse is filing a Chapter 7. Sitting down with an experienced bankruptcy attorney to do a thorough review of your assets will allow you to determine if any liquidation issues exist.

Required Information

The bankruptcy filing will require the filing spouse to provide proof of the total household income. The filing spouse will have to provide copies of the non-filing spouse's pay stubs (or other similar income statements) and tax returns, both of which involve their personal information. This information is used by the debtor's attorney and Trustee to determine such things as eligibility in Chapter 7, the plan payment in Chapter 13, and potential assets/disposable income related to tax refunds.

Visit Law Offices of Ryan F. Beach

This website is designed for general information only. The information presented at this site should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

Friday, February 20, 2015

Will I Lose My Bank Account Funds If I File Bankruptcy?

One of most common questions I get from potential debtors is, "can the Trustee take the money in my bank account?" If you are filing Chapter 13, it is important to know that there is no liquidation of assets. However, you must go through a liquidation analysis and pay your unsecured creditors at least as much as they would get in a theoretical Chapter 7 bankruptcy. So, the threat of losing assets to liquidation is only present when you file Chapter 7.

The Bankruptcy Code was designed so that individuals could get a "fresh start." Part of that fresh start is making sure that an individual doesn't lose everything to Trustee liquidation. Elimination or discharging all of your debt is an incredible relief; however, it wouldn't mean much if you also lost your home, car, bank account funds, clothing, furniture, appliances, etc. To ensure a fresh start, the Bankruptcy Codes allows for certain exemptions.

Cash in a bank account is protected or exempted with an exemption referred to as "wildcard." Currently, the wildcard exemption has a limit of $12,725.00. However, your ability to exempt the bank account funds may be limited by the other assets you have an ownership in. If you have other assets that require exemption and the wild card is the only way to protect them, there may be a liquidation issue.

If you are considering filing bankruptcy, consulting with an experienced bankruptcy attorney is a must. I, like many bankruptcy attorneys, offer free consultations. When I consult with potential clients I always discuss in detail their assets and the available exemptions so that they know what to expect in Chapter 7 or Chapter 13.

Visit Law Offices of Ryan F. Beach

This website is designed for general information only. The information presented at this site should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.