The Florida Bankruptcy Law Blog

Debtors Think Their Plan Will Protect Tax Refunds From Chapter 7 Trustee

Tax refunds due on the date you file for Chapter 7 bankruptcy are part of your bankruptcy estate, and consequently, the trustee will make you turn over your tax refund. Refunds due for current and past year’s tax returns are at risk. I had a telephone consultation with a couple from south Florida who think they found a loophole in the collection of tax refunds in bankruptcy court. Their plan may work, but I do not think the plan is proper or honest.

These prospective debtors had not filed their 2008 or 2007 tax returns. The knew they would owe penalties. The reason they said their returns were not yet filed is that they were gathering documentation of substantial additional tax losses for both years. With the losses included, they were confident they would receive a substantial tax refund for both years notwithstanding late filing penalties. If they filed returns now, without documentation or amount of eligible losses, they would owe the IRS taxes and interest on top of the late filing penalties.

Here’s the plan they came up with. They said they were going to file the tax returns now without the expected losses. The returns would show significant tax liability. They had no money to pay these taxes, but they figured it would take the IRS months to review the 2007 and 2008 returns and to ask for payment. Even if the IRS asked them for the tax money they felt they could work out a payment plan with the IRS. After filing these tax returns, they would proceed to file Chapter 7 bankruptcy and file with the trustee their 2007 and 2008 returns showing taxes owed.

Court Refuses To Dismiss Chapter 7 Bankruptcy Because Debtor Found High-Paying Job After Filing Date

You’re unemployed. You’re poor. You are stressed-out by debts and debt collectors. So, you file Chapter 7 bankruptcy. Then, shortly after you file bankruptcy you find a job. Not just "a job" but a really good job that pays high salaries. All of sudden you have money. In fact, you make so much money that you could afford to pay back most of your debts if you were in a payment plan. What happens to your Chapter 7 bankruptcy? Can you continue to wipe out all your debts even though you were fortunate enough to find a new, high paying job.

The question was discussed in a recent Florida bankruptcy court decision. A United States Trustee argued that granting a Chapter 7 discharge would be an abuse of Chapter 7 where the debtor was unemployed on the petition date, but thereafter obtained employment that enabled him, post-petition, to deposit more than $1,000 cash flow in a 401k account. The U.S. Trustee argued that the debtor’s new job enabled him to pay at least $668 per month to creditors if his Chapter 7 were converted to Chapter 13. Is it an abuse to let this debtor keep all his new income and pay no debts because he filed Chapter 7 bankruptcy?

Income Tax Season For Chapter 7 Bankruptcy Trustees

Its tax season once again. In bankruptcy, tax season means hunting season for Chapter 7 trustees. During the first four months of year the Chapter 7 trustees are especially diligent about going after IRS tax refunds owed to debtors. The general rule is that any money, including income tax refunds,  owed to you at the time you file bankruptcy is part of the bankruptcy estate and available to pay your creditors. There are certain exemptions such as joint refunds where only one spouse files bankruptcy and refunds from the earned income tax credit. Bankruptcy trustees will ask all debtors if they expect a tax refund based on their 2009 tax return, and in most cases will require the debtor to send a copy of the 2009 tax return whenever it is filed.

I read a good blog post from Ohio bankruptcy attorney Wayne Novik about how debtors can best protect tax refunds. One option, discussed in the post, is simply to delay filing bankruptcy until you have filed your tax return and received a refund. You can spend your tax return on necessary expenses such as past-due mortgage or car payments or your bankruptcy attorney fee. Of course, if you receive a large tax refund the trustee may ask you to account for the money. As a practical matter, if you expect a small tax refund the Chapter 7 trustee will decide its not worth pursuing and will let you keep the money.

Too Strange For Springer, Too Weird For Oprah: Debtors Try To Fix A Messed Up Transaction

Bankruptcy debtors do some strange things. A couple came to see me about a debt they forgot to put in their bankruptcy petition. The husband filed Chapter 7 bankruptcy in 2007 by himself without an attorney. The case is closed; discharge entered. Its in the archives. A year earlier, the husband had tried to sell his motor home to a third party. The husband could not deliver title to the motor home because there was a lien on the home. The agreed sales price was $40,000 but the lien was $60,000. The buyers must have wanted the motor home really badly because they gave the husband the $40,000 as long as he promised to pay off the lien as soon as he could.

The husband gave the entire $40,000 to the bank with the lien. He never could clear or pay off the lien with other money. In the meantime, the bank kept deducting the monthly lien payments from the $40,000 until, a few years later, there was no more money. The husband never spent any of the money on anything but the loan payments.

You can probably guess what happens next. When there was no more money left in the fund to make payments the bank repossessed the motor home from our surprised buyers. The buyers paid the agreed price and thought everything was taken care of. Now, the husband wants me to add the aggrieved buyers to his bankruptcy petition even though the case was closed. There are a couple interesting legal issues.

Bankruptcy Debtor's Plan To Convert Credit Card Debt To Cash

Most people who file bankruptcy do so reluctantly and as a last resort; most bankruptcy debtors are honest people who would pay back every penny if they could afford to do so. Most of my clients feel horrible and ashamed about bankruptcy. And then, there are people who use bankruptcy to make money and wring every dollar they can from their lines of credit and credit cards.

Here’s this week’s bankruptcy scam-plan. A client consulted me about a future bankruptcy filing. I told him he had to postpone bankruptcy because his recent repayment of a loan created a creditor preference issue. Since he had to delay bankruptcy anyway, he asked me about his plan to make the most of it. He would use his untapped credit cards to buy department store gift cards. He did not want to use the cards to shop at department stores. What he planned to do is to sell the gift cards for cash, at a discount, over a web-based gift card market. He would run up credit cards to their limit to buy the gift cards, sell the card for cash, and put the cash in his pocket. Then, he would wait several months until the credit charges "aged" before he would wipe out the credit cards in a bankruptcy. The cash, of course, would not be disclosed. Pretty slick.

Forty Month Homestead Rule: Does It Count Time Of Occupancy Or Time Of Ownership?

There is less homestead protection in bankruptcy than under Florida law outside of bankruptcy court. Florida law provides immediate homestead protection without any limit on value. In bankruptcy, a debtor may protect only $137,000 of homestead value for the first 40 months. A client called me today because he was concerned about whether or not he passed the "40 months test" for homestead protection if he had to file bankruptcy. The client purchased a residence in Florida four years ago for $350,000 all cash. The client has been renting a home in Georgia during a temporary job assignment. He intends to return to the Florida house after the temporary assignment, or alternatively sell the Florida house and look for a new home when he gets back to the Florida home office.

The client said he read an online article written by another attorney that he interpreted to jeopardize his homestead exemption in a bankruptcy. The article stated that bankruptcy law requires 40 months of continuous occupancy in order to qualify for unlimited homestead protection in bankruptcy. The client thought his homestead protection would be limited to $137,000 because he has been temporarily living in Georgia.

What my client read, or thought he read, is not correct. The bankruptcy law does not require 40 months continuous occupancy for unlimited homestead protection; the Bankruptcy Code limits homestead exemptions in Florida to $137,000 if the debtor "acquired their home within the 1215 days before the filing." Courts interpreting the statute found that homestead exemption is based on the time of ownership and not time of occupancy.