Who Owns and who gets to keep the Tax Refunds in a Chapter 7 or Chapter 13 Bankruptcy?

Well, tax season is finally over or at least winding down.  Most of my clients have already received their 2013 state and federal income tax refunds.  The Minnesota property tax refund and Minnesota rent credit refund won’t be sent, however, until later in the year.   Who owns the tax refunds is always a big issue in any kind of personal bankruptcy, whether it’s Chapter 7 or Chapter 13.  This is because refunds not yet received are considered an asset, even the tax refunds for this year that won’t be received until next year.  Most people don’t ordinarily think of these as assets, because they may be way out of reach at least for now.  But the Chapter 7 and the Chapter 13 bankruptcy trustees definitely count them as assets.

In a Chapter 7 bankruptcy the starting point in answering the above question is that the bankruptcy  trustee owns the refunds. This can be said because upon the filing of a Chapter 7 bankruptcy, ownership of everything – all the Debtor’s assets right down to his or her socks – is transferred to the trustee.  My job as a lawyer representing the Debtor is to keep the trustee from being able to keep as much of the assets as possible by claiming those assets as exempt.  Anything that’s exempt can’t be kept by the trustee.  When you see the term “no assets case,” that means it’s a case where all of the assets were exempt so that the trustee was not able to keep anything.  Most of the Chapter 7 cases I file fall into this category.  The ownership only passes to the trustee in theory, and then it comes right back to my client.  A relatively painless process.

In a Chapter 13 bankruptcy there is no passage of ownership to the trustee, but the trustee takes the assets into account when determining what the payments are to be in the Chapter 13 Plan.  If there are any non-exempt assets, the payment plan must provide enough so that the unsecured creditors receive an amount equal to at least the amount of the non-exempt assets.  This is referred to as the “best interests of the creditors rule.” When we know there are going to be non-exempt assets, sometimes a Chapter 13 can be preferable.  This is because it is usually easier to keep an asset and make some monthly payments than it is to give up the entire asset.

When it comes to tax refunds as you can see, the key to happiness in a Chapter 7 or Chapter 13 bankruptcy is to be able to claim them as exempt.  This can often be easier said than done.  First of all, if you are claiming the Minnesota State exemptions, there is no exemption for tax refunds.  There just was a case where the Debtor was claiming that the property tax refund was “relief based on need” and therefore exempt under the Minnesota state exemptions, but the court said no; so there remains no exemption under the Minnesota state exemptions for any kind of tax refunds, at least not that I know of.

Luckily most of my clients qualify to use the Federal exemptions.  Under the federal exemptions, each Debtor has what we call a wild card exemption under which up to $12,725 of anything can be claimed as exempt.  When the parties are married and filing a joint case, each of them has a wild card  (also called the catch all) exemption of up to $12,725.  It is often said that a married couple claiming the federal exemptions gets to double their wild card.  This is absolutely not true, and you really have to be careful about that kind of thinking.

When a married couple file a joint Chapter 7 or 13 case and claim the federal exemptions, the Debtor has a wild card exemption and the Co-Debtor has a wild card exemption – but that exemption  does not double.  I often find myself pulling out a note pad and making a “his” and “her” column to try to keep track of this.  Assets owned by “him” and claimed as exempt under the wild card go in one column and assets owned by “her” and claimed as exempt under the wild card go in the other.  Joint assets can be equally divided between the columns.  Neither column can total over $12,725.  And beware:  a lot of stuff you may think of as joint may be looked upon differently by the trustee.

When the assets include tax refunds, the question arises as to which of the two columns the tax refunds belong in.  Years ago I assumed that if the tax return was joint, then the refund should be split evenly between the spouses for purposes of claiming it as exempt.  Turns out this is not how the 8th Circuit Bankruptcy Appeals Panel sees it.  In the case of In re Carlson decided in 2008, they decided that the tax refunds have to be prorated between the spouses based on the each spouse’s income.  So if one spouse earned 80% of the income, then 80% of the refunds gets attributable to that spouse.    If one of the spouses is not working, then all the refunds belong to the spouse who works.  This can obviously be a problem if allocating it that way runs one spouse’s wild card exemption  above the magic $12,725 level.

It’s complicated.  Not properly claiming the exemptions for the tax refunds is one of the most common mistakes made by people who file their own case without a lawyer.  Most of the time I can manage to claim all of the tax refunds as exempt so my clients can keep them, but sometimes I just can’t get it all.  For one thing, there are always other assets in addition to the refunds for which the wild card exemption is needed.

This post  is for general information purposes only and does not create an attorney-client relationship.  It is not legal advice. Please 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.

The Fiscal Cliff

I’d be interested in hearing people’s thoughts about whether we are going over the “fiscal cliff.”  Are they going to put some pillows down in the canyon for us to land on, or are we just going to go SPLAT?

Cliff near Pike's Peak

I don’t think I’d want to go over this one.

Minnesota Bill Collectors Going Out of Business?

Collection Agencies Going Out of Business?

Collection Agencies Closing Offices? Economy Worse then Expected?

Is the economy getting so bad that the bill collectors are going out of business?  From where I sit it appears that at least two of the old tried and true bill collectors have moved out of Minnesota.  When a bankruptcy case is filed, it is very important to be sure that all the creditors are being notified.  The notices are sent out to the creditors by US Mail by a central noticing center which is operated by the court.  When an address is bad or when a notice comes back in the mail in connection with one of my cases, I get notified of that right away by email from the clerk of court’s office. In cases where a collection agency has taken over an account, I always try to list both the original creditor and the agency in the bankruptcy papers.  If the debt has also been referred to a lawyer, I list the law firm on the list of creditors too.

For as long as I can remember, Allied Interstate has been one of the big collection agencies in these parts.  In recent times their office was within a few blocks of mine.  They were located in that big, white office building on the northwest corner of the intersection of I-394 and Highway 169 known as the Interchange Tower.  There was more than one occasion when I was about ready to go over there in person and yell at them.  To me they were an institution, kind of like the federal government.  It never occurred to me that they would not always just be there.  In bad economic times, I would have assumed that their business would have just gotten all the better.

You might imagine how shocked I was to receive a notice, and then another notice, telling me that the address I was using for Allied Interstate was bad.  Well, they had apparently been assigned a number of debts of a couple of my clients – so I had to find a new address for them.  At first I assumed that they had just moved to a new location in their old neighborhood.  As I almost always do when I have such a problem, I went to Google looking for a new address.  There were no results for Minnesota except what I already had.  I went to Bing.  Same result.  Next I tried to call all the phone numbers I could find for Minnesota locations of Allied Interstate.  More shock – they were disconnected.  Finally I stared trying locations outside of Minnesota.  They had been a nation-wide operation.  The first few numbers I tried were not being answered.  Finally someone answered at an Allied Interstate office in Ohio.  He said to use the following address:

Allied Interstate, PO Box 4000, Warrenton, VA 60197-6123

So I added that address to the list of creditors at the court web site for both of my cases, and it seems so far to have been a good address.  Meanwhile a notice that I had sent to an Illinois office of Allied Interstate came back in the mail as well.  One has the impression that this outfit is not doing so well.

Not long after this business with Allied Interstate, I received notice that an address I had been using for one of the bill collecting law firms was bad.  They were it seemed to me a lot like Allied Interstate in that they had been around forever.  To me they seemed to be one of the top law firms that over the years had driven many of my clients to my door.  Their office had always been in St. Paul, but they sued people from all over the Twin Cities.  Again I went to Google and several other sources.  What I found or seem to have found is that they closed their St. Paul office and are now doing business from their home office in another state.

From day to day I see little indicators – including the above – that the economy is worse than anybody in the media outlets wants to admit.

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

How Much it Costs to NOT File Bankruptcy

Promptly filing bankruptcy can minimize your losses

How Much Will You Lose if You Don’t File Bankruptcy?

Nearly every day I am asked how much it costs to file bankruptcy. Here I turn the question around and ask – assuming that you already know that you qualify for bankruptcy – how much is it costing you to not file.

So often when someone comes to my office, the story I hear involves the loss of things we could have saved if the bankruptcy had been done sooner. In the past few months I have seen all the situations I am about to list here:Large tax refund used to try and get caught up on debts, but it wasn’t enough.

Use of home equity line of credit to pay unsecured debts. What this does is take perfectly good equity in the home, which in bankruptcy would have been exempt, and squander it on unsecured credit card debt. Even after maxing out the home equity line of credit, the credit card debt is still to high to manage. Had a bankruptcy been filed sooner, the debts could have been eliminated and the equity in the house saved.

Mortgage payments stopped so credit card payments, or medical bill payments, can be made. The bill collectors for the credit cards – and lately those for the medical providers too – will often be a lot more agressive than those for the mortgage company. In this scenario, people allow themselves to be pressured into paying credit card or medical bill payments before they make their mortgage payment. The mortgage falls so far behind that foreclosure is started. The mortgage is now too far behind to ever be brought up to date, and the house will be lost. A bankruptcy before things got this far would have eliminated the medical bills and credit card debt and saved the house.

Large loans from relatives for payment of credit card debt. When a job is lost or a medical problem arises, many of us have wonderful relatives who are willing to help – financially. Often this kind of help will come from a parent. It’s not unusual for loans from relatives to exceed $20,000 – accumulated a little at at time. This will sometimes continue until the relative is tapped out and can’t lend anymore. The money from the relative was not enough to bring the debts under control. A bankruptcy filed sooner could have saved Mom’s or another relative’s savings account.

Bankruptcy not considered until wage garnishment actually begins. Filing bankruptcy is not like buying a can of beans at the grocery store. It’s not even like going to your accountant or to H&R Block to file your taxes. It’s not just a matter of one session in the lawyer’s office. Typically it takes me six to eight weeks to have a case prepared for filing. If I rush it, maybe I can shorten that to three or four weeks – or not. Until the case is filed, the wage garnishment continues. There goes one or two months of take home pay.

My office is the right place to deal with these and similar problems, but there are many, many times I wish my client would have come in sooner.

This is for general information purposes only, is not legal advice, and does not create and attoney-client relationship. My office is a debt relief agency, helping people file for relief under the federal bankruptcy code.

The Most Common Reasons People File for Bankruptcy

Unemployment CartoonWith the recent downturn in the economy, bankruptcy has become an increasingly popular way for people to relieve their debts. There are hundreds of reasons why a person may choose to file bankruptcy, but some reasons are more prominent than others. Here are the four most common reasons people file for bankruptcy in America:

  1. Medical Bills: With the number of uninsured citizens in the United States rising by the day, many families have high medical debt for accidents they could not pay for on their own. Medical bills can be upwards of $100,000 for one person, and that debt is typically more than one person can pay off. Bankruptcy provides patients with the opportunity to relieve their medical debts and start fresh in the future.
  2. Unemployment: Loss of work is another common cause of bankruptcy in the modern world. As people lose the ability to work, they lose the ability to pay their bills. Thus their debt piles up, and bankruptcy becomes the only solution they have to get back on their feet.
  3. Excessive Debt: Some people just make poor financial decisions, and they end up in debt because they over-exceeded their financial limitations. This is often the case with young adults who are not used to living on their own. Credit card debts and high car loans are some of the biggest financial problems in America, and they are among the most significant causes for bankruptcy.
  4. Divorce: Divorcees often encounter debt that was once part of a marriage. This, combined with the cost of divorce as a whole, may cause someone to build up enough debt to qualify for bankruptcy.

There are plenty of other reasons why you may feel pressed to file bankruptcy, but those are the most common ones at this time. If you happen to fit into one of those categories, you might want to speak with a debt relief attorney to assess your options.

Two pro se cases not heard last Thursday

I was at the Federal Courthouse in Minneapolis last Thursday for a meeting of creditors. The room was full and I was planning for a long wait with my client.

To my surprise the trustee – who is the person who runs such proceedings – stood up and asked two apparently married couples to leave. These individuals were there without a lawyer and were obviously pro se – or in other words representing themselves. From the words that were exchanged it sounded as if they had gone to some sort of a non-lawyer document preparation service.

Apparently whoever they had gone to had neglected to tell them that they were supposed to provide a copy of their most recent tax return to the trustee well in advance of the date of the meeting of creditors.

I expect that those parties will be allowed to provide their tax returns to the trustee and reschedule their meeting of creditors – which those who know me know I often call the “hearing,” because that word is a good one to describe what happens. I can’t help but wonder what else might be wrong with those bankruptcy filings.

I’ve been concerned for some time that some of these document preparation outfits are dangerous. If you search this blog I believe you’ll find something from a while back where I was carrying on about such a service located in India which had contacted me and wanted to essentially use my name.

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