Well, tax season is finally over or at least winding down. \u00a0Most of my clients have already received their 2013 state and federal income tax refunds. \u00a0The Minnesota property tax refund and Minnesota rent credit refund won’t be sent, however, until later in the year. \u00a0 Who owns the tax refunds is always a big issue in any kind of personal bankruptcy, whether it’s Chapter 7 or Chapter 13. \u00a0This 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. \u00a0Most people don’t ordinarily think of these as assets, because they may be way out of reach at least for now. \u00a0But the Chapter 7 and the Chapter 13 bankruptcy trustees definitely count them as assets.<\/p>\n
In a Chapter 7 bankruptcy the starting point in answering the above question is that the bankruptcy \u00a0trustee 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. \u00a0My 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. \u00a0Anything that’s exempt can’t be kept by the trustee. \u00a0When 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. \u00a0Most of the Chapter 7 cases I file fall into this category. \u00a0The ownership only passes to the trustee in theory, and then it comes right back to my client. \u00a0A relatively painless process.<\/p>\n
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. \u00a0If 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. \u00a0This 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. \u00a0This is because it is usually easier to keep an asset and make some monthly payments than it is to give up the entire asset.<\/p>\n
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. \u00a0This can often be easier said than done. \u00a0First of all, if you are claiming the Minnesota State exemptions, there is no exemption for tax refunds. \u00a0There 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.<\/p>\n
Luckily most of my clients qualify to use the Federal exemptions. \u00a0Under 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. \u00a0When the parties are married and filing a joint case, each of them has a wild card \u00a0(also called the catch all) exemption of up to $12,725. \u00a0It is often said that a married couple claiming the federal exemptions gets to double their wild card. \u00a0This is absolutely not true, and you really have to be careful about that kind of thinking.<\/p>\n
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 \u00a0does not double. \u00a0I often find myself pulling out a note pad and making a “his” and “her” column to try to keep track of this. \u00a0Assets 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. \u00a0Joint assets can be equally divided between the columns. \u00a0Neither column can total over $12,725. \u00a0And beware: \u00a0a lot of stuff you may think of as joint may be looked upon differently by the trustee.<\/p>\n