Will I Lose My Tax Refund by Filing Chapter 13 Bankruptcy?
February 19, 2010 
Bankruptcy, Case Study, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy, Question and Answer, Tax Refunds 
Comment A Chapter 13 bankruptcy is a repayment plan that lasts three to five years. During that time the debtor is required to devote all disposable income to the repayment of debt. Most bankruptcy trustees and courts consider tax refunds part of the debtor’s disposable income that is over-withheld and should be paid into the Chapter 13 plan. However, instead of reducing the amount payable under the debtor’s plan, tax refund money is paid to unsecured creditors that would otherwise not be paid. If the debtor is paying a 100% repayment plan, the trustee will not request turnover of any tax refunds.
Some courts have approved a provision in the Chapter 13 plan that requires the Internal Revenue Service to forward any tax refund to the trustee’s office. However, at least one bankruptcy court has found this practice to be unlawful. In United States v. Carroll, No. 2:09-cv-13505 (E.D.Mich. Jan. 20, 2010), the bankruptcy court concluded that the IRS was not a party to the debtor’s chapter 13 case and did not have an opportunity to object to the plan. Additionally, as a part of the United States government the IRS possesses sovereign immunity that it did not waive.
Keeping your money and avoiding an income tax turnover may be as simple as adjusting your paycheck withholding. By speaking to a tax professional you may be able to predict your tax liability and put more money in your pocket each payday. However, be careful to avoid a situation where you do not withhold enough taxes and end up with a large tax bill at the end of the year.
If your tax refund is largely due to an Earned Income Tax Credit (EITC), the IRS allows tax payers to request an advance payment of the EITC. Information regarding this advance payment program can be found on the IRS website. If you qualify, your employer will add additional money to your take-home pay each paycheck.
If you want to avoiding surprises during your Chapter 13 bankruptcy, seek out and hire an experienced bankruptcy attorney. An experienced bankruptcy attorney can discuss your financial situation with you and help you keep your hard-earned money for your family.
Tags: What Is A Reaffirmation Agreement?
A reaffirmation agreement is a new contract between a debtor in bankruptcy and a creditor in which the debtor agrees to continue personal liability on a secured loan and the creditor agrees to not repossess the property. Reaffirmation agreements are only available to Chapter 7 debtors and the agreement must be executed before the bankruptcy discharge is entered. The debtor can revoke the agreement with 60 days after the agreement is signed.
Reaffirmation agreements are typically used to continue payments on secured property the debtor wishes to retain, like a car or house. A debtor that reaffirms a debt is personally liable for any subsequent default on the loan, and can be sued by the lender and the property may be repossessed. This is a serious consideration since the debtor is not eligible for another Chapter 7 bankruptcy discharge for eight years, and is not eligible for a Chapter 13 discharge for 4 years.
The Bankruptcy Code requires that the agreement contain many disclosures concerning the contract terms. The debtor must also file a statement of current income and expenses. If the debtor’s income after expenses is not enough to pay the monthly loan, the court may decide to not approve the reaffirmation agreement. The debtor’s attorney must also certify to the bankruptcy court that the debtor was advised of the legal effect and consequences of the reaffirmation agreement, and that the reaffirmed debt will not create an undue hardship for the debtor or the debtor’s family.
Since reaffirmation agreements are new contracts, the parties are able to change the terms of the original agreement. This could mean a reduction of principal, interest, or a change in payment length in order to make the monthly payments more affordable to the debtor. While the reaffirmation process is a voluntary process, the creditor is generally not anxious to repossess the property, and the debtor usually has more leverage in bankruptcy to negotiate a better deal with the creditor.
If you are considering a bankruptcy and a secured car or house loan, discuss your individual situation with an experienced bankruptcy attorney. There are many options to retain property both during and after bankruptcy. Your bankruptcy attorney can help you select the best course of action.
Is There Any Way You Can Get Rid Of A Second Mortgage By Filing Bankruptcy?
November 20, 2009 Bankruptcy, Case Study, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy, Question and Answer Comment The short answer is NO if you file a Chapter 7 bankruptcy unless you are surrendering your house. However, if you want to keep your house, you might be able to strip off the second mortgage if you file a Chapter 13 bankruptcy. It works like this. Under current bankruptcy law there is no mechanism to modify a first mortgage secured by a debtor’s home. However, many homeowners have found relief for their home mortgage woes by filing a Chapter 13 bankruptcy case, which allows a bankruptcy judge to strip away an entirely unsecured second mortgage lien.
For example, let’s say you purchased your home for $400,000, and obtained two mortgage loans. Today your home is worth $300,000 and you owe $305,000 on the first mortgage and $70,000 on the second. During a Chapter 13 bankruptcy case a bankruptcy court can strip away the second mortgage lien on your home because it is entirely unsecured by your home (i.e. the value of your home is not more than the first mortgage debt). The above example is only possible when the second mortgage is not secured at all by the value of the home. If the home is merely under-secured, lien stripping is not authorized. For instance, if the value of the home in our example is $305,001, then the loan is partially secured (by one dollar) and its second mortgage lien cannot be stripped.
By stripping the lien from your home, the second mortgage loan becomes an unsecured, non-mortgage debt. Unsecured debts receive the lowest payment priority during a Chapter 13 bankruptcy and typically receive pennies on the dollar, if anything. If you believe that Chapter 13 bankruptcy lien stripping could benefit you and your family, call me at 339-0222 so that I can advise as to whether you can strip off your second mortgage.
My Credit Card Company Is Offering A Credit Monitoring Service: Is This Service Worth It?
Several companies have sprung up that promise to help protect you against identity theft. How do they do this? By monitoring your credit. An alert is sent to you when changes to your credit occur such as when a new account is opened or a new address associated with you is logged with a credit reporting company. Some credit monitoring services are independent companies and some are operated by credit reporting agencies such as Trans Union and Experian.
While there are advantages to using these services, there are some problems with them such as:
1) If you receive a Notification from a monitoring company, your information may have already been used illegally by someone who has opened up a new credit account with your stolen identity.
2) The monitoring services cannot catch certain forms of identity theft that don’t access your credit report such as a person using a stolen identity to a) obtain a Payday advance loan, b) apply for a job; or c) apply for a driver’s license.
3) Most of what these services offer, you can do yourself. You can file fraud reports and place fraud alerts and credit freezes on your credit files with credit reporting companies.
Many people believe that credit monitoring activities will make them completely secure against identity theft. That simply isn’t true. However, credit monitoring can be an important piece of your protection package. Some other things you can do include:
- Leave important documents in a safe place at home.
- Only carry the credit cards or other cards you plan on using that day (do not carry your Social Security Card).
- Properly destroy old credit cards, checks and unneeded receipts
- Shop only on secure Web site with companies you trust.
- Check your bank and credit card statements monthly for any suspicious activity.
- Personally check your credit report at least once a year.
Since the cost of a monitoring service usually runs $10 to $15 a month, it may be worth it for the peace of mind in knowing that you are purchasing a little added insurance to avoid being the next victim of identity theft.
Question: What Should I Do If I Can’t Afford To Pay An Increased Credit Card Payment? Should I Contact A Debt Consolidation Company Or Consider Filing A Chapter 13 Reorganization Bankruptcy?
Before you take any affirmative steps to reorganize your debt with a debt management company or file for bankruptcy, you should sit down and work up a detailed financial budget for you and your family so you know how much disposable income you have each month to apply towards your credit card debt.
When you have completed your budget, contact your credit card companies directly and see if you can get them to agree on changing the terms of the repayment of the debt. Unfortunately, most credit card companies will not change the repayment terms unless you fall at least three months behind. Of course, if you stop making your payments, your credit score will drop significantly.
If you are unable to negotiate directly with your creditors, then consult with an attorney to consider all of your options including hiring a debt management company or filing bankruptcy.
A common question we receive in our offices is “what’s the difference between private debt consolidation and filing Chapter 13 and which is better?” Though the concept is nearly the same, there are many important differences. If you’re interested in maintaining a good credit rating and you don’t want your debt problems to become public record, then private debt consolidation may meet your needs. Private debt consolidation, however, can’t give you guaranteed court protection from your creditors. Creditors can still proceed with legal action against you to collect their debts. On the other hand, Chapter 13 offers significantly more protection to you and your family, allowing you to pay your creditors a percentage of the debt owed (often as low as ten percent) and discharges the remaining balance. And perhaps best of all, creditors cannot repossess or foreclose on your property.
What’s best for you will naturally depend on your specific debts, personal priorities and income status.
Question: If a foreclosure action has already been filed in state court, can you still file a bankruptcy in order to save your home?
Yes. The filing of a Chapter 13 bankruptcy can stop the foreclosure action even if a judgment has already been entered against you and the sale of your home has been scheduled so long as the Master Commissioner has NOT actually sold your home. As soon as the bankruptcy case is filed, your bankruptcy attorney will contact the attorney for the mortgage company as well as the Master Commissioner in order to notify them of the filing and at that point no further action can be taken by the mortgage company to sell your home.
Your Chapter 13 plan filed with the bankruptcy court will propose to pay the mortgage company a certain amount of money each month to catch up on your past due payments. These payments are sent to your court appointed trustee who forwards them on to your mortgage company.
Of course, you must also be able to begin making your normal monthly mortgage payment in addition to a payment to the bankruptcy trustee. The advantage of filing a Chapter 13 is that you are given five years to catch up your past due payments at zero percent interest. On the other hand, mortgage companies usually require the past due amount paid in a lump sum payment in order to stop the foreclosure unless you are able to complete a loan modification.
If you do not have the ability to save your home from foreclosure, you may need to consider a Chapter 7 bankruptcy to protect you from garnishment if the mortgage company ends up with a deficiency judgment against you. This would occur if your house sells for less than what you owed on it.
Question: What Happens To Real Estate That You Own In A Chapter 7 Case When It Is Not Your Residence?
August 28, 2009 Bankruptcy, Case Study, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy, Question and Answer Comment Many people tend to think that they can keep real estate that they own in a Chapter 7 case as long as they are current with the payments at the time the case is filed. However, that is not always true. Debtors must take care to disclose the status of real estate with regard to value, outstanding debt, and payment status to their attorney. No one, including the attorney, wants any surprises.
Facts: Debtor was living between her home and her mother’s home who she cares for. She had a mortgage on her home and her son lived in the house and paid the mortgage. She had approximately $14,000.00 in equity in the home. Her living arrangement with her mother was not disclosed during the consultation, review, or filing appointments.
At court, the debtor informed the Trustee of these things. This was the first time the attorney heard of this arrangement. She had also claimed the equity as an exemption under U.S.C. 11 section 522(d)(1). The Trustee determined this was an asset case and objected to the exemption on the basis that she could not exempt this equity because it was not her residential real estate since she resided at her mother’s home. All of her mail went to that address, her driver license had that address, and this was also the address she used for voter registration. The Trustee later filed a Motion to Sell the Real Estate which the Court granted.
This was not the client’s intention. She wanted to keep her home and eventually move back in permanently with her son. In an effort to save her home, she moved the Court to convert to Chapter 13 which was granted without objection by the Trustee. She must now fund a plan to pay money to her unsecured creditors.
The moral of this story is to fully disclose your assets and any arrangements involving those assets to the attorney. It is a matter of losing assets you think may be protected by exemptions which may not be the case. Those assets can be liquidated through sale in a Chapter 7 case by the Trustee to pay your unsecured creditors for the debts you owe. The attorney can best advise you on how to handle your assets. Remember that what you don’t disclose can hurt you by either losing the asset, forcing you into a Chapter 13, or most harshly losing the asset and not receiving a bankruptcy discharge at all.
Q&A: Small Business and Tax Liability
I am a small business owner who is thinking about closing down my business but my company still owes the IRS and the State of Kentucky for some unpaid payroll taxes and sales taxes. As the owner of the corporation, will I be responsible for paying these taxes if the business stops operating? If so, can I get rid of this tax liability by filing a Chapter 7 Bankruptcy?
It depends. If you were an active member of the corporation and involved in the day to day operations including the paying of bills, then you probably will be deemed to be a “responsible party” by the IRS. For the Kentucky withholding tax obligations, you may be deemed personally “responsible” simply by being an officer of the orporation even if you were not an active party in the bookkeeping operations of the business.
As a responsible party, you may be personally liable for any unpaid trust fund obligations of the corporation. What is a trust fund obligation? It is that portion of the tax liability that was withheld from an employee’s paycheck and not turned over to the government. The matching FICA obligation of the company is not a trust fund obligation and will be deemed uncollectible by the IRS if the company goes out of business. Also, all sales taxes collected from a customer are deemed to be trust fund taxes.
If your business does have to close down, then you may need to file an individual Chapter 7 bankruptcy in order to get relief from any personal guarantees that you may have obligated yourself to in order to get the business up and running. However, you cannot discharge in bankruptcy any trust fund tax obligations that you may have. You will have to work out a payment plan after the bankruptcy is over with the IRS and the state or you may consider filing a Chapter 13 in order to pay back the tax liabilities over five years without the accrual of interest or penalties.
Question: When should you consider filing for bankruptcy relief?
There is no perfect time to file for bankruptcy. Everyone’s situation is different, but the best time to seek legal advice is when you first become aware that you are unable to pay your bills on a timely basis or when you begin to receive phone calls from creditors. Debt can easily accumulate if you lose your job, incur unforeseen medical bills, run up credit card obligations or take undue risk with investment opportunities.
Even if you have waited until a judgment has been entered against you or your wages are about to be garnished, you can still file bankruptcy to stop the garnishment and obtain a fresh start … free of debt.
From a credit standpoint, filing for bankruptcy eliminates most if not all of your debt which allows you to begin the rebuilding of your credit. Most individuals can obtain good financing terms on a future loan within two years of filing for bankruptcy so long as their credit score has improved after the filing.
Because the stress can be overwhelming, you should seek the advice of a reputable bankruptcy law firm. They will outline your financial options and help you manage or eliminate your outstanding debt. It’s a great feeling knowing that you will soon be on the road to financial recovery.
Question: What is the difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy?
When you elect to file for Chapter 7 Relief, you seek to have most if not all of your debts eliminated or discharged. However, in order to receive the discharge, you must be prepared to allow a bankruptcy trustee the right to sell any of your non exempt property for the purpose of turning over the sales proceeds to your creditors. Your bankruptcy attorney will be able to determine and advise you as to whether your assets are exempt and protected from sale by your trustee.
If you don’t want to lose your nonexempt property, you may want to consider filing a Chapter 13 which is a repayment plan that proposes to pay back some, but not necessarily all of your debt including your credit cards and medical bills. The amount you have to pay back depends on the amount and type of debt that you have, how much property you have, and how much money you make.
If you are looking for a way to save your home from foreclosure, then filing a Chapter 13 Bankruptcy may be the solution. You can immediately stop the foreclosure process by filing a Chapter 13 Plan that allows you to cure your home mortgage arrearages over five years.
About the Kentucky Bankruptcy Blog
The KY Bankruptcy Blog, hosted by Julie O'Bryan, is designed to give real life examples of ways to overcome obstacles faced prior to, during and after filing a bankruptcy. Recent Court decisions and bankruptcy laws will be discussed as they relate to these real life situations. The blog will also discuss relevant family law issues that arise with filing bankruptcy and information pertaining to restoring credit after bankruptcy.
You can contact Julie using our online form or by calling 502.339.0222.
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