chapter 7
Which type of bankruptcy to choose?
Attorney Michael Goldstein discusses the differences that consumers need to be aware of when determining if it is a better idea to filea Chapter 7 bankruptcy or a Chapter 13 reorganization.
How to protect your tax refund from the Trustee
When someone who is facing financial difficulty decides to file for bankruptcy there are many secondary choices they must make. They may be able to decide which chapter of bankruptcy they should file, Chapter 7 liquidation or Chapter 13 reorganization. Once that decision has been made the Debtor then needs to decide, should they keep their home; should they keep their boat? Depending on their income and assets though the biggest choices typically revolves around their more liquid assets though. Which assets should they protect from the Trustee in a Chapter 7 bankruptcy case, and which ones should they expose.
In many situations there is no choice, due to the fact that a cap has been hit on an asset, such as a bank account, lost wages in a law suit or equity in a car. However, one such asset that is typically very difficult to exempt, unless a Debtor uses the Federal exemptions and has a wild card available is an anticipated or even realized tax refund. Under 11 U.S.C. § 542(a), any property that the Debtor held prior to filing his or her bankruptcy becomes property of the estate and is subject to turnover to the Trustee upon request.
In the past, if a Debtor has money owed to him from the Internal Revenue Service, such an asset must be listed on Schedule B of the bankruptcy petition and generally, the Trustee will look to take those funds as part of the liquidated bankruptcy estate, or demand that the unsecured Creditors be paid at least that amount in a Chapter 13 plan based upon the B22 analysis. This was true until very recently when an ingenious Debtor, James Winslow Graves and his bankruptcy attorney beat the system. You see, a Trustee is only entitled to demand an asset which the Debtor has a right to. This is no different then the legal theory “you can only give title to what you own”.
What this Debtor did was simply allow the IRS to take his tax refund and hold it in their possession until such time as he may need to pay taxes in the future. Now this may sound almost like a fraudulent transfer, but the IRS code is very clear on the matter. Under the tax code, once a tax payer elects to leave those funds on deposit with the United States and apply the overpayment to his or her future tax liability, that decision is irrevocable, or as my six year old child would say, “no take backs”! More specifically, the tax code states, “no claim for credit or refund of such overpayment shall be allowed for the taxable year in which the overpayment arises.” 26 U.S.C. § 6513(d).
The Trustee in this case argued the position that the refund amount was property of the estate under 11 U.S.C. § 541(a)(1), and that, since Debtors were receiving the benefit of the application of the refund, the funds should be treated as an account receivable of the Debtors, and Debtors should therefore be required to turn over an equivalent amount to the estate. However, both the Bankruptcy Court and the 10th Circuit Federal Court held that the tax code is clear and specific in its language and intent. The courts held the Debtor once he filed his taxes, had no rights to the tax refund and as a result could not “take it back”. If you find yourself in a similar position, The Florida case of In Re Graves, Docket Number. 08-1462 and In re Graves, 396 B.R. at 73 is the case to cite. The Creditors and the Trustee may think it unfair and even borderline deceptive, but the courts have spoken with its full opinon..
How bankruptcy can affect children
The affects of bankruptcy can have a lasting impact on a person. Once a child is involved the affects can last for a long time. The topic of dealing with the affects of bankruptcy on children is not a topic that has received much attention over the years, but this topic is one that should be addressed.In many cases, parents try to minimize the affect of a bankruptcy on the family. Children in most situations may not even know anything has transpired. Moreover, it may be far less traumatic even if the children know their parents are facing financial distress, then to know your home has been taken away by the bank.
Once a bankruptcy claim is filed the courts will decide which debts require payment. As such, the court can determine that certain expenses are allowed while others are not. Once such expenses is 529 plans or other savings accounts for college. During times like this consulting with an attorney can be beneficial in order to get a good understanding of how your child may be affected once you file for bankruptcy. In addition, there are many other situations that can comingle a parents debt with the financial interest of their kids. To read more about these situations, check out Jonathan Ginsberg an Atlanta bankrutpcy attorney’s blog.
There is no doubt that the stress of bankruptcy can take a toll on a child. A study conducted by the Iowa State University Institute for Social and Behavioral Research states that children who experience socioeconomic adversity at an early age are at an increased risk of experiencing mental health challenges during their teen years. A child may begin to wonder whether or not their family will have a place to live or what will happen to them in the future. A family’s financial status can affect a child because of society’s emphasis on being financial stable and achieving a certain level of success. Once a child realizes the lack of financial resources available for their family that child may be embarrassed and could be subjected to negative treatment amongst his or her peers.
Despite all the negative emotions associated with bankruptcy it is important to keep your children involved in the financial matters of your family. If a parent is laid off from their job of made the decision to file for bankruptcy the financial make up of that family changes. The next step is to explain the financial situation of your family with your children so they are aware of the situation. Parents must remember that children are learning from how their parents are dealing with bankruptcy and other financial matters.
The issue of bankruptcy is not an issue topic to discuss. For parents the issue of bankruptcy can become even harder to explain because their financial outlook can be affected as well. Despite this obstacle, it is important to minimize as much stress as possible and make the right decisions that will benefit your children in the future.
Why Your Tax Forms Are So Important to Your Attorney
When you work with an attorney on a bankruptcy filing, there’s a long list of documents you’ll be asked to gather and give to your attorney. Some of the most critical documents you’ll gather are your last three years’ worth of tax filings, both state and federal. Why are these so important?
First, and most important, tax returns contain a great deal of the financial information that your attorney will use when preparing your bankruptcy petition. Your attorney will review your returns to get a good foundational grasp of your financial situation—what real estate you own and whether it’s investment property; what bank accounts or investments you may hold; whether you are self-employed and how the business has been doing over time, and so on.
Similarly, your attorney uses your tax returns as a kind of financial checklist when preparing your bankruptcy petition. Most of the information that you’ve already reported on your tax returns is information that your attorney must include in your petition.
Importantly, bankruptcy is information-based. In other areas of law, when you go to court, you may be asked to testify and tell your side of the story. At your bankruptcy hearing, your bankruptcy petition—the specialized financial report that your attorney has presented to the court for approval—tells your story for you. The bankruptcy trustee who examines your petition may ask some questions, but the more accurate and detailed your attorney’s information, the easier it is for the bankruptcy trustee to review and approve your petition.
So don’t flinch when your attorney asks for copies of your tax returns. You can share them confidently, knowing that your attorney is helping you toward bankruptcy’s “fresh financial start.”
The forgoing post was drafted by Marsha Graham and Liz Weishaar who have both been heard on the Consumer Debt Radio Show and work in an of counsel relationship to The Law Office of Goldstein and Clegg, LLC as well as for the Law Office of Weishaar and Graham.
Foreclosure or Bankruptcy – Which Is the Lesser of Two Evils?
In the past, “bankruptcy” and “foreclosure” were dirty words. But in today’s economy, they’re realistic solutions to financial black holes brought on by job joss, medical catastrophe, or predatory mortgage lenders and credit card companies. If you’re a homeowner struggling with financial disasters, you probably know that you need to decide whether a foreclosure or a bankruptcy is the lesser of two financial evils.
If you choose bankruptcy, you may be able to eliminate credit card debt, medical bills, court-ordered judgments, and even debts for overdue utilities. With a discharge of these overwhelming debts, you can often keep up with the mortgage, thus saving the family home.
In contrast, choosing foreclosure means you’ll lose the house… but the house may not be worth saving if its value is less than the remaining mortgage. Homeowners who’ve worked with us have chosen to rent, or sometimes they own investment properties that they can move into, such as a multi-family house.
But neither bankruptcy nor foreclosure is an easy, one-size-fits-all, solution. For example, a bankruptcy stays on your credit report for 10 years, while a foreclosure is there for 8 years. Because a foreclosure drops off a credit report 2 years earlier than a bankruptcy, many homeowners believe it’s a “better” solution. But many reputable credit counselors report that a foreclosure has twice the negative impact on a credit score as a bankruptcy. It’s extremely difficult to get a new mortgage after losing a property to foreclosure. And some individuals who’ve gone through foreclosure report that they haven’t qualified for apartments they wanted, even though they’re able to afford the rent after the mortgage is gone.
On the other hand, we’ve seen that individuals who’ve gone through bankruptcies are better candidates for future financing, and often receive it earlier than individuals who’ve gone through foreclosures. The reason is simple: bankruptcy erases debt. After a bankruptcy, you don’t owe anything to anyone. Your income is yours again. And creditors also know that you can’t file for bankruptcy for another 8 years, so you can’t walk away from any new debt that you incur.
In some cases, a homeowner may be so far behind on the mortgage that a foreclosure is inevitable. There are two typical solutions. First, the homeowner could file for bankruptcy right before the foreclosure. If the mortgage lender sells the property for less than the mortgage owed, the difference between the foreclosure price and the mortgage (which the homeowner would ordinarily have repay to the lender) is discharged through the bankruptcy. Second, mortgage lenders know very well that homeowners can discharge this difference in bankruptcy instead of paying it back. So they’ll often wait to foreclose, which gives the homeowner an option to do a short sale (to be discussed in an upcoming blog).
In short, if you’re a homeowner struggling with debt, you have a lot of options. If you’re facing a financial crisis that may end in either foreclosure or bankruptcy, talk to an experienced attorney who can help you determine your best option. The right decision can save you years of financial trouble.
