A few tips about Tax Refunds in Chapter 13 Plans

It’s tax time – again.  For many, including myself, it can be a time of fear and loathing.  Given a choice between having a colonoscopy or going to see my accountant to prepare my annual taxes, I would probably choose the former.  I’m relieved to be able to say that mine are done and filed.  So glad to have that over with.  Since I’m self employed, I almost always have to pay in.

For my Chapter 13 clients tax time has another layer of complexity, trickiness might be a better word.  Most Chapter 13 plans in Minnesota are required to have a provision that says the Debtors are to provide copies of all annual state and federal income tax returns to the Trustee’s office as soon as the returns are filed.  If they are to receive a refund, the provision usually allows married debtors filing jointly to keep the first $2,000 of the refunds, and allows individual filers to keep the first $1,200 of the refunds.  After those allowances, the balance of the refunds is to be paid into the Chapter 13 Plan as an additional contribution.  This contribution benefits the creditors, but usually has no particular effect on the monthly payment plan for the Debtors.  After making this extra contribution, in most cases the monthly payments under the Plan continue unchanged and on the same schedule.

The preferred method of sending the tax returns to the Trustee is now to make the return into a PDF and email it to an email address that the Trustee’s office has designated for that purpose.  After that the Debtors should wait for a letter from the Trustee’s office which will tell them how much of the refund should be mailed in.  The letter is usually sent promptly, although it comes by snail mail.  Since I tend to be copied with both the emails and the snail mail, I have had quite of bit of this correspondence arriving on my desk over the past few days.  So far this year there has been only one case where I disagreed with the way the Trustee’s office was calculating how much my clients were to send in.  When that happens, I have always been able to straighten things out with a of series of email exchanges with the staff person who did the calculations.

Here’s a few important things to know about how they calculate exactly how much the extra contribution from the tax refunds is supposed to be.  First of all, if you get a refund from one level of government – for example the feds – and have to pay in to the other level of government – for example the state, usually you can expect the amount you had to pay in to be deducted from the amount of the refund.  If you paid to have an accountant or other preparer to do your returns, be sure to send the bill for the tax preparation in to the Trustee’s office along with the tax returns.  At least this year I have been seeing the Trustee’s office allow a credit for the cost of tax preparation.  In one letter that just arrived on my desk, they allowed a credit for a $96 processing fee from TurboTax.  

If you find your refund to be a whole lot more than the part you are allowed to keep, I’ve never seen anybody get in trouble for adjusting their wage withholding so that next time the refund won’t be so large.  Such adjustments can involve a lot of trial and error, however, and you might find it pretty hard to get it just right.  It’s easy to overshoot the goal and wind up having to pay in to the IRS and Department of Revenue.  Like Garrison Keillor says, be careful.

Keep in mind that everything I say here only applies to Minnesota cases.  I would expect that practices vary quite a bit around the country concerning this topic.  And as I always say, this post is for general information purposes only.  It is not legal advice and does not create an attorney-client relationship.  Please consult the attorney of your choice concerning the details of your case.

 

Higher Median Incomes Effective April 1st

As explained on the Chapter 7 page and Chapter 13 page of my site, most bankruptcy eligibility questions key off how your income compares to the median income levels set by the Justice Department for the state in which you live.  The justice department has a new median income update which becomes effective April 1, 2014.  The income levels for all family sizes in Minnesota have gone up by at least another $1,000 or so per year.   The new median incomes are are follows:

1 Person 2 People 3 People 4 People 5 People 6 People 7 People
$49,592 $65,398 $78,715 $92,277 $100,377 $108,477 $116,577
  • Add $8,100 for each individual in excess of 7.

Every case is different, but in most cases if your gross income annualized over the six months before filing comes to less than the median for your household size, you should qualify for a Chapter 7 bankruptcy.  If your income is higher than the median, there are other options.  One option is to try doing the means test.  If you pass, a Chapter 7 might still be possible.  If not, your most likely choice would then be to do a Chapter 13 bankruptcy.

Even if you pass the means test, sometimes a Chapter 13 is still a better idea.  It seems that once your income is above median, the trustee’s office presumes that you are not entitled to a Chapter 7.  You will have to be ready to prove all the information that you put in the means test.  You may be asked for several months of bank statements.  You may be asked about the income of any children or other individuals in your household.  The reasonableness of the expenses you claim may be challenged.  By the time the trustee is finished with this process, you may decide to convert your Chapter 7 to a Chapter 13; and if you don’t you may neverthless wish you had started with a 13 in the first place.

While there are mathematical formulas involved, it remains more of an art than a science.  The trustee’s office looks at the numbers but also at the totality of the circumstances in deciding how much trouble if any to give you. You need to get a competent lawyer and stay close to that person as you go through the process.

This post is for general information purposes only and does not create an attorney-client relationship.  It is not legal advice.  I am a debt relief agency, helping people file for relief under the federal bankruptcy code.

Getting Rid of that Judgment Once and For All

When you read about bankruptcy you are very likely to see quite of bit of carrying on about stopping garnishment, stopping foreclosure, ending harassment from creditors, stopping those nasty phone calls, and in general making the debts just go away.  Bankruptcy tends to be good for all those things.  You may not see as much about getting judgments cleared from your record, however, because the discharge of your debts from the bankruptcy court does not automatically do that.

The bankruptcy court discharge is an order from a bankruptcy judge which eliminates most personal liability for unsecured debts.  It contains among other things an order addressed to your creditors requiring that they make no further collection efforts.  It just requires the creditors to stop.  For the most part, it doesn’t require the creditors to take any other action.  One of the things it does not require is that they file a satisfaction of judgment with the state district court if they have a judgment against you.  So when your bankruptcy is done, the creditors will leave you alone.  You won’t hear from them again.  If the creditor has a judgment against you, the creditor is prohibited from trying to collect anything on the judgment.  But the judgment itself just sits there and continues to be a matter of public record just as it was before the bankruptcy.

Most of the time for most people that is a big “SO WHAT?”  As long as the creditor is paralyzed and can’t collect, who cares whether the judgment is still on the record?  After all, the judgment will expire when it is ten years old, and the bankruptcy discharge definitely prevents the creditor from renewing the judgment before it expires.  But sometimes a lender will care if you are trying to get a mortgage or refinance an existing mortgage.  In certain odd instances an employer or future employer might care too – judgments don’t look the best on a background check.

If you should be one of the relatively rare folks who really needs to get the judgment cleared from the state court record, there is a procedure for doing that.  It is not part of the federal bankruptcy statute, but is a matter of state law.  In Minnesota, the process is laid out in Minnesota Statutes Section 548.181.  The clerk of court in most Minnesota counties can provide you with a form for this and a set of instructions to go with it.  The form and instructions for Hennepin County can be found here.  The statute is fairly easy to understand and reads as follows:

“548.181 DISCHARGE OF JUDGMENTS AGAINST BANKRUPTCY DEBTORS.

Subdivision 1.Application for discharge.
 A judgment debtor who has received a discharge under United States Code, title 11, or an interested party, upon paying a filing fee of $5 for each judgment, may apply to the court administrator of any court for the discharge of all judgments entered in that court against the judgment debtor that were ordered discharged by the bankruptcy discharge.
Subd. 2.Application requirements; service. 
An application under subdivision 1 must identify each judgment to be discharged, must be accompanied by a certified copy of the judgment debtor’s bankruptcy discharge or a certificate by the clerk of the United States Bankruptcy Court of the discharge, must state the time the judgment creditor has to object as specified in subdivision 3 and the grounds for objection as specified in subdivision 4, must be served at the expense of the applicant on each judgment creditor either:(1) in the manner provided for the service of a summons in a civil action and must be accompanied by an affidavit of service; or(2) by certified mail to the judgment creditor’s last known address as it appears in the court record, and must be accompanied by an affidavit of mailing.
Subd. 3.Objection to discharge.
 The court administrator, without further notice or hearing, shall discharge each judgment except a judgment in favor of a judgment creditor who has filed an objection to discharge of the judgment within 20 days after service of the application on the judgment creditor. An objection to discharge of a judgment must be served on the judgment debtor in the same manner as an answer in a civil action.
Subd. 3a.Certification of discharge. 
Upon receipt of a filing fee of $5, the court administrator shall certify to the judgment debtor or other interested party the judgments against a person that have been discharged by the administrator.
Subd. 4.Court order. 
If a judgment creditor objects to the discharge of a judgment, on motion of the judgment debtor, the judgment creditor, or other interested party, the court shall order the judgment discharged except to the extent that: (1) the debt represented by the judgment was not discharged by the bankruptcy discharge; or (2) the judgment was an enforceable lien on real property when the bankruptcy discharge was entered. If the judgment was an enforceable lien on some, but not all, real property of the judgment debtor, the discharge shall only be entered as to real property not subject to an enforceable lien.

 

That looks pretty easy doesn’t it?

Well, IT’S NOT AS EASY AS IT SEEMS.  Here’s the catch. Even though the law clearly states that the filing fee is only $5.00, Hennepin County has started charging a regular district court filing fee of $324 as well as the $5.00.  As far as I know, they are the only county in the state that is doing that, but don’t be surprised if you run into it in some other county.  I expect that the idea is going to spread.  You have to pay one filing fee per judgment, so if you have a lot of judgments to get rid of this could really run into money.  It’s probably a violation of law for them to be doing this, but for a few hundred dollars nobody so far has been able to afford to challenge it.

Around the year 2000 the court clerks across the state came up with forms and instructions for this that are available to the public.  Since then nobody has hired me to do this procedure. You definitely need a lawyer to do the bankruptcy itself, but once the bankruptcy is completed most people can do this judgment discharge application themselves.

This post is for general information purposes only and does not create an attorney-client relationship.  It is not legal advice.  It is recommended that you consult the attorney of your choice concerning the details of your case.

Bankruptcy Court Says They’ll Stay Open for Ten Business Days

Late yesterday I received the following email from the clerk of bankruptcy court in Minneapolis:

“In the event of a government shutdown on October 1, 2013, the United States Bankruptcy Court for the District of Minnesota will be open and will maintain normal hours and operations for approximately 10 business days.  All proceedings and deadlines remain in effect as scheduled and CM/ECF will be available for the electronic filing and review of documents.”  
 

This somewhat surprised me because last week I received the following email from the clerk of federal court’s office in Minneapolis:

"JUDICIARY TO REMAIN OPEN IF GOVERNMENT SHUTS DOWN

In the event there is a government shutdown beginning October 1, 2013, the United States District Court for the District of Minnesota will continue normal operations Tuesday, October 1, 2013. All cases, including civil and criminal jury trials, will be processed and argued and judgments will be issued and enforced according to usual schedules and priorities. The Clerk’s Office will be fully operational and CM/ECF will continue to be fully functional.”   (CM/ECF means Case Management/Electronic Case Files.)

I always thought of the bankruptcy court as being a branch of the federal judiciary, and the earlier of the two emails seemed to be saying that the federal judiciary would not be shut down at all.   Guess I misunderstood that.  Apparently if the government shutdown continues for more than two weeks, we can expect the bankruptcy court to close.

Either way the news for now is that the Minnesota bankruptcy court is open for business as usual.  Filings are being accepted and nothing is being postponed or rescheduled.  I expect that this is at least in part because there are very stiff filing fees in bankruptcy court.  Right now the filing fee for a Chapter 7 is $306 and  the filing fee for a Chapter 13 is $281.  Late last week I was charged $30 to file an amended document with the court.  I imagine that at any one time there are  enough of these fees in the pipeline to keep the place going for a while.

Nevertheless, I invite all my clients to keep an eye out for emails and phone messages from me concerning possible delay or rescheduling of creditor meetings or other events. The word for today is UNCERTAINTY.

This post is for general information purposes only, is not legal advice and does not create an attorney-client relationship.  I am a debt relief agency.  I help people file for relief under the federal bankruptcy code.

Marital Status and Bankruptcy – Best to Plan Ahead

Marital status can make a big difference in a bankruptcy case.

There’s a certain amount of rejoicing in these parts over the events at the Minnesota legislature yesterday which appear to make legalization of gay marriage a certainty in this state probably by next week. I assume that we will have a lot of people who are now legally single soon becoming legally married.

I find myself thinking about all the times a married person has come in to see me about a bankruptcy and wanted to file individually and not jointly.  I had to explain that for a married person it is usually best to do it jointly.  When a married person insists on filing individually, I will often just refuse to take the case.  I’ve actually done quite a few individual filings for married people, but I usually don’t want that case unless there is a really compelling reason to not file jointly. The probability of something going wrong in such a case is multiplied by a factor of I’m not sure what – but by a substantial factor. I don’t consider “but my wife has such a good credit score” to be a compelling reason.

For anybody thinking about both marriage and bankruptcy, you might want to consult with a competent lawyer concerning whether it would be best to file the bankruptcy before or after the wedding.

What to Bring to the First Meeting at My Offce

For me the starting point for most bankruptcy cases is a call from the prospective client.  If you are reading this that could be you.  Before anything else I like to do a screening over the phone.  This can be done in about fifteen minutes, sometimes maybe a bit longer.  No need to be afraid of me.  I’m easy to talk to.  There’s no fee for the phone conversation.  If the information from the phone conversation indicates that bankruptcy is appropriate, whether that be a Chapter 7 or a Chapter 13, the next thing I want to do is meet face to face in my office for a more serious consultation. For this I will charge a small consultation fee, which I will have quoted in the phone conversation.  I will credit the consultation fee against my fee for the case if we decide to go ahead.  If I suggest that you come in for a consultation, it’s because I’m already fairly certain that it is a case I would accept.

There are four batches of information that I would ask you to bring when you come:

  1. Forms.  There are two forms on my web site, the bankruptcy questionnaire and the monthly expense sheet.   Please print these two forms and fill them out in pen and ink.  Pencil is OK too.  Then bring them with you when you come.  Some of the questions, especially on the first form, are hard to answer.  If you can’t figure out the question, leave it blank and we’ll talk about it when you come in.  Complete the expense sheet to the best of your ability, and we’ll go over those numbers when you come in too.  Remember that things you charged on a credit card count as an expense as well as the things you paid for in cash or by means of your checking account.
  2. Tax returns.  I’d like to see your state and federal tax returns for the past two calendar years, along with your W2s and any similar supporting paperwork.  At the time of writing this post, that would be the returns for 2011 and 2012.  If you filed for a Minnesota property tax refund or Minnesota rent credit, I’d like to see that return for the past two calendar years as well.  If you file separate returns for your corporation or LLC, bring them along as well.
  3. Pay stubs and income information for the past seven months.  I need to see the last seven months of pay stubs from your your job and from the job of your spouse.  If you don’t have them, get them from your employer or from your employer’s web site.  By seven months I mean the six previous months plus the month we are in.  If you don’t have pay stubs because you are self employed, I need a spread sheet showing your gross income and your business-related expenses for that same seven month period.  If you don’t have pay stubs because you are unemployed, I need detailed info on what unemployment benefits you are receiving and what taxes are being withheld from your benefits if any.  If you are receiving child support or spousal maintenance, I would want dates and amounts received during that seven month period.  If you are on  Social Security or Social Security Disability, provide me with details of how much you received gross in the past seven months and what if anything was withheld from that.  If there is any kind of income coming in from anywhere, I need to know about it.
  4. Details about your debts.  I want to see every piece of paper you have describing each and every debt.  Include your credit cards, car loans, mortgages, tax debts, student loans and any fines and penalties you owe.  I usually can’t make the student loans go away, but I still need to know all about them.  You probably intend to keep paying your mortgages and car loans, but we need to list them anyway.  Some of your tax debt may be dischargeable, but even if it isn’t we need to list it all.  Be sure to include nasty letters from lawyers and collection agencies.  Eventually we will be checking your credit report, but for the first meeting the information you have handy about your debt will probably be enough.

As you might have gathered by this point, that consultation in my office is usually quite thorough.  I should be able to give you an opinion concerning your situation that will be worth the trip.  Figure on spending an hour and a half – more if we are planning on running a means test.

My Number is on a Billboard in Blaine??!!

I just received a call from someone who says that my office phone number (952-544-6356) is on a billboard on Central Avenue in Blaine, MN near the intersection with 89th St.  Furthermore this caller indicated that it says the fee for filing bankruptcy is $860, which would be way below my usual fee even for the simplest case.

When I run a Google search for $860 bankruptcy in that neighborhood, I find references to a service which apparently is a paralegal outfit.  Their Google Plus page says they have closed or moved.  So did they put up my phone number so theirs would quit ringing or what?

If anybody else has seen this, I’d sure like confirmation that it’s actually there.  Frankly, I’m not sure what I would do about it if it was.

What NOT to do while going Over the Fiscal Cliff

 

Cliff near Pike's Peak

Watch out for the temptation to under withhold .

Most people I talk to have not heard of the “fiscal cliff.”  Those who have believe it will not affect them.  This includes a husband and wife I met with yesterday.  But when I ran the numbers for them, based on a November 1st article in Forbes, I found that between the two of them their paycheck withholding should go up by about $438 per month.  That is, the net take home pay for the two of them together will be $438 less per month starting January 2, 2012.  That is just a few days from now.  When I tried to warn them and suggested that they should be thinking about how they would deal with this, they blew me off.  They are absolutely in denial about the prospect that this could ever happen.  If we go over the fiscal cliff as scheduled,  this should come as a heck of a shock.

My calculations assume, of course, that no steps will be taken to reduce the impact of the fiscal cliff.

From where I sit it looks like a majority of people are living right on the edge.  For them a drop in take home pay like this will mean they no longer have the funds to pay their credit card debt.  Often when people are in such a situation, they go to their employer and increase the number of exemptions they are claiming for withholding purposes on their paychecks.  They claim more withholding exemptions than they should.  Some increase the number of exemptions to the point that no taxes are being withheld at all, and for them all that is withheld is social security and medicare.  This increases their take home pay, but it is at the cost of not having enough taken out to cover state and federal tax liability.  The income which should have been withheld for taxes is then used to make payments on credit card debt.  Often this is still not enough to get that credit card debt under control.

When it comes time to file their tax return, they find that they owe a tax debt which is too large for them to pay.   Now on top of the credit card debt there is a substantial tax debt.  Eventually they wind up in my office.  I can help get rid of the credit card debt.  But as long as the tax debt is less than three years old, there’s nothing I can do to help with the tax debt.

The worst creditors you can have are the IRS and the Minnesota Department of Revenue.  In almost all circumstances, it is better to stop paying other debts before you stop or reduce the withholding of taxes from your pay check.  Don’t fall for the temptation to unreasonably increase the exemptions you claim for withholding from your paycheck.  That will work for a short time, and then you’ll really wish you hadn’t done that.

This post is for general information purposes only and should not be considered legal advice.  You should consult the attorney of your choice concerning the details of our case.  Reading or responding to this post does not create an attorney-client relationship.  I am a debt relief agency helping people to file for relief under the federal bankruptcy code.

 

New Median Incomes for Minnesota Bankruptcy – Again

Minneapolis Federal Courthouse, where Hennpin County Bankruptcy cases are filed

Minneapolis Federal Courthouse . If you live in Minneapolis or the Western Suburbs, this is where your bankruptcy hearing will be.

Whether you qualify for a bankruptcy and what type of bankruptcy you qualify for is largely a matter of what your household income is – gross annual income based upon and calculated from what happened over the past six calendar months.  It seems to me that I just finished posting an update on these numbers, but that was in May and already new numbers have come out – effective November 1, 2012.A table showing the new numbers for Minnesota can be found on my Chapter 7 page.  They are bad news for anyone who lives alone or in a two person household, since the median incomes for one and  two person households have gone down this time.  The median annual income for a family of one dropped by $496 per year and the median annual income for a family of  two dropped by $738.  For everyone else, those in households of more than two persons, the news is good.  The annual median income for a family of three actually increased by $1,300.  For a household of four it went up $409, and for household sizes above four it went up $409.  These increases are of course per year increases, so even the largest – the one for a household of three – is only a bit above $100 per month.

I can’t explain why these numbers changed, or why there is such a difference from one size of household to another.  I can only report that the change did take place.  I have been watching these changes, which usually take place very six months, for several years now.  It seems to me that they usually go up across the board.  The fact that some have gone down this time and that the rest have not gone up by much – to me this seems to indicate serious weakness in the economy.

Whenever I am meeting with a client to go over bankruptcy possibilities, I have to explain that these median income tables are subject to change.  If somebody qualifies now but is close to the edge, haste in getting the case filed might be advisable.   If a person or couple is above the applicable median income, they may try doing the means test.  Usually someone who is just a little bit above the median income can pass the means test and still file a Chapter 7.  I have to caution, however, that above median Chapter 7 debtors are subject to much closer scrutiny by the US Trustee’s office than are those who are below the median.

Lots more can go wrong in a Chapter 7 bankruptcy when the income is above median, even if the Debtors do appear on paper to have passed the means test.  Often it is safer for folks in these circumstances to file a Chapter 13.

Paying Off Your Chapter 13 Plan Early

Nothing is better than being debt free.

Stick with your Chapter 13 Plan

From time to time I am asked the following question by a potential Chapter 13 client:  If somehow I could come up with the money, could I pay my Chapter 13 plan off early?  If you  have ever seen a Chapter 13 plan, it is easy to understand how this question would arise.  The plan document provides for monthly payments in a certain amount, and then it shows what the total of the payments over the life of the plan will be.  It shows how all the money is  to be applied – so much to unsecured creditors, so much to attorney fees, so much for the trustee’s fees, and certain amounts to taxes or other priority debts.  Usually it will even state in terms of a percentage exactly what fraction of the unsecured debts are being paid.

It seems obvious that once the plan is approved, if the Debtor could come up somehow with the total due under the plan, he or she should be able to  wrap it up early and get their discharge early.

Well, guess what.  That’s not how it works.  Or at least it usually is not how it works.  Simply stated the rule is this:  the only kind of Chapter 13 Plan that can be paid off early is a 100% plan.  Chapter 13 plans fall into two categories:  100% plans and  less than 100% plans.  In a 100% plan, all the unsecured debt is to be paid under the plan.  In a less than 100% plan, only a portion of the unsecured debt is to be paid.  The vast majority of Chapter 13 plans are of the less than 100% variety.

So in most plans, where less than all of the unsecured debt is scheduled to be paid, the trustee will welcome extra payments from folks who have come into extra money that was not expected, such as an inheritance or big bonus at work.  In fact the trustee might REQUIRE that such funds be paid into the plan.  But after that extra payment is made, unless the plan is of the 100% variety,  the regular plan payment is due again the next month – and that continues until the end of the plan or until 100% of the unsecured debts are paid, whichever comes first.

The result of all this is that in most Chapter 13 cases, it is self defeating to take draconian measures for the purpose of raising extra money to pay into the plan.  Unless you can raise enough to pay off 100% of the unsecured creditors who have filed their claims with the bankruptcy court, there’s no reason to make an extra effort.  In fact you might be more or less punished for any such extra efforts.

If you are in Chapter 13 and receive extra money from somewhere, consult your attorney about it right away.  If the  amount is significant enough you probably have an obligation to report it to the bankruptcy trustee.  Sometimes your lawyer can negotiate a deal which allows you to keep some of the funds and pay in only part of it.

This post is for general information purposes only and does not create an attorney-client relationship.  It is not legal advice.  Seek the advice of your own attorney concerning the details of your case.

David Kelly Law Office is a debt relief agency helping people to file for relief under the federal bankruptcy code.

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