This time of year, people who are considering filing bankruptcy worry about whether they will lose their income tax refund if they file bankruptcy. The short answer is: no, you do not have to give up your tax refund in bankruptcy – as long as you do some planning. Many people deliberately overwithhold on their income taxes as a way of getting a large tax refund. This refund is often used for large purchases or to pay annual bills, such as property taxes. This time of year, we often have people who need to file bankruptcy worried about whether they will lose their tax refund.
You can protect your tax refund and still file bankruptcy. If you file a chapter 7, you can use your exemption to protect or exempt the tax refund. Whether you have an exemption available to protect the refund will depend on what state you are filing in and what exemptions you are entitled to use. Generally, individuals who are entitled to use the Texas exemptions may choose between state or federal exemptions. Under the federal exemptions, you can exempt a tax refund (depending on the size of the refund and the amount of the exemption available to you.)
In a chapter 13 debt reorganization, you simply build the tax refund into your budget. Most individuals and families these days need more money in the budget, not less. It is important to discuss your desire to keep your tax refund with your bankruptcy attorney. We always ask about any anticipated refund and protect the maximum tax refund.
Don’t let fear of losing your tax refund in bankruptcy keep you from debt freedom through bankruptcy. Talk with a qualified bankruptcy attorney. It is easy to come up with a plan so that you can keep that hard earned tax refund.
Filing Bankruptcy Without Losing Your Tax Refund
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Bankruptcy Planning in Unstable Economy
Face Your Fear
The gloom and doom headlines are scary. Many families are behind on their home mortgages, and foreclosures are increasing. The “invisible bread line” of people on food stamps grows longer each day. Unemployment continues to soar. Worry and even fear is natural in these times. But worry or fear never helps. Looking at your debt through the lens of this unstable economy does help. Without a doubt, this is a time to get your finances in order. You need a plan. Bankruptcy may be one option for stabilizing your personal or business finances.
When to Consider Bankruptcy
If you have unsecured debt that you are not able to pay off within a reasonable time, you may want to consider bankruptcy. Unsecured debt is debt where you have not put up collateral. If your only struggle is unsecured debt, a Chapter 7 bankruptcy may help. In a Chapter 7 bankruptcy, you can wipe out most unsecured debt. This includes credit cards, finance company loans, payday loans, unsecured bank loans, medical bills, and certain tax debt.
Signs that you may need to file bankruptcy:
1) you have no emergency savings because it takes all your income to pay your bills;
2) you are charging food, utilities or other basic living expenses on credit cards and using your income to make minimum payments on those same cards sinking further into debt each month;
3) you are not making any progress paying down the principle on your debt;
4) you juggle your payments and are constantly being charged late fees or bank overdraft fees;
5) you get behind on your mortgage or car payment trying to keep up with payments on unsecured debt;
6) you know you may be laid off and you would not be able to make your car or mortgage payment on unemployment benefits.
Everyone wants to pay their debt. No one wants to file bankruptcy. This is why many people struggle paying unsecured debt, instead of paying for essentials. Or they pay credit card debt for years and make no progress on paying it off. If you are in over your head, don’t procrastinate. Don’t let pride or shame keep you from protecting you and your family in this economy.
Focus on what is important
Continuing to pay debt if you are eventually going to default is not wise. Focus on what is important. Obviously, housing and transportation to work are more important than paying unsecured debt. Particularly if your job or business is unstable, it may be smart to pay off your car. If you lose your job, transportation is still critical to look for another job or to travel to another job. The same thing is true with your home. If you weren’t paying unsecured debt, how quickly could you pay off your home mortgage?
Need for emergency fund
Paying unsecured debt may also keep you from being able to build up an emergency fund. Often, people view their credit cards as essential “for an emergency.” An emergency fund built from money now going toward minimum payments on credit cards is a more realistic emergency fund.
Is bankruptcy the right choice?
Everyone’s situation is different. Factors, such as how old you are, your health, and your future job stability, all should be considered in deciding whether bankruptcy is the best choice for you. Talk with a qualified bankruptcy attorney and see what your options are. We all hope the economy improves dramatically and quickly. But if things continue to worsen, have a plan that makes the most of the income you do have.
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Living with Student Loan Debt
With the declining economy and lack of jobs, more people are going back to school. They hope more education will qualify them for a higher paying job. They live on student loans and borrow to pay all expenses. Unfortunately, more education is no longer a guarantee of a higher paying job or even a job. Before using this strategy, do independent research on your future job market and pay scale. You may make a bad situation worse. Bankruptcy does not deal well with most student loan situations. A chapter 7 may wipe out your other debt so that you have enough to pay student loans. A chapter 13 may lower your student loan debt by including the student loan debt in the chapter 13 payment so that you can live. But in most situations, without showing extreme hardship, bankruptcy will not get rid of student loan debt.
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Filing Bankruptcy Without Your Spouse
Occasionally, a person who is married wants to file bankruptcy without his or her spouse. There can be various reasons for this, such as the debt was made only by one person; the couple is concerned about obtaining new credit in the immediate future; or perhaps the other spouse simply does not want to file. The good news is: you are permitted to file without your spouse. If you are living together, however, their income (and their expenses) will be considered in the bankruptcy. If you are separated, you sign a declaration of separate household. If you are separated, the spouse’s income is not considered except to the extent that they are making contributions to your household, or paying support.
There are cases where we recommend that only one spouse file. This is usually where all of the debt is in the name of one person and the spouse does not own separate property. In these limited cases, it is best for the person holding the debt to file alone and leave the credit of the spouse unimpaired. When the discharge is obtained, all community property held at the time of filing or acquired in the future is protected by the bankruptcy stay.
So, if you need to file bankruptcy, you can file by yourself. The bankruptcy discharge will free you from the burden of the debts, and as long as your spouse doesn’t own separate property, the discharge will free the marital community as well. In every case involving a married debtor, we evaluate the case both ways and give you all options.
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Getting Rid of Delinquent Taxes
Not one of the lucky people waiting on a tax refund? One of the most stressful types of debt for people to have is tax debt. While it is true that the IRS has powerful collection tools, coming up with a game plan to get rid of delinquent taxes is possible. Many times, people who get behind on taxes stop filing their tax returns out of frustration and fear. There are options both bankruptcy and non-bankruptcy. Check out possible solutions to your tax problems.
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Worried About Losing Property in Bankruptcy?
Many people struggling with overwhelming debt do not consider bankruptcy because they believe if they file bankruptcy, they will lose property. This is not true.
According to the National Association of Chapter 7 Trustees, 90% of the people who file bankruptcy are “no asset” cases. Does this mean 90% of the people filing bankruptcy don’t own assets? Of course not – it means that in 90% of bankruptcy cases, all of the debtor’s assets are protected from sale by exemptions or they are liened and cannot be liquidated in bankruptcy.
Most people do not own any property that is not exempt or protected. While it is important to discuss all your assets with your bankruptcy attorney, you are probably more likely to lose property by not filing bankruptcy if you have aggressive creditors.
You can find more details on exemptions and how they can be used to protect all of your property if you file bankruptcy on the Chapter 7 page.
Posted in bankruptcy, chapter 7, exemption Tagged assets, chapter 13 bankruptcy, chapter 7 bankruptcy, exemptions, property Leave a comment
A Fresh Start in 2011
As we look toward the New Year, we often look back at our mistakes and look forward with a renewed hope of change and doing things better. The very essence of bankruptcy is a fresh start. If you are trying to decide whether bankruptcy can help you, consider these things.
Chapter 7 can be used to totally eliminate debt such as:
- Credit cards
- Medical bills
- Personal loans
- Bank account overdrafts
- Old utility bills
- Certain tax debts
Chapter 13 can be used to:
- Catch up on a mortgage
- Lower car payments
- Catch up on taxes
- Limit payments (usually to just pennies on the dollar) on unsecured debt, such as credit cards, personal loans, etc.
In most cases, people do not lose any of their property. If you have been struggling with debt, consider a free bankruptcy evaluation to see if bankruptcy can help you start over. Whether your debt problems are caused by misfortune, mistakes, or both, bankruptcy may help you get back on your feet and be able to live without the stress of debt. Call us about a fresh start for 2011 today!
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Tips for People Struggling with Debt Who have Social Security Income
Social security benefits are not counted as “income” for purposes of the means test. Because of this, your eligibility for a Chapter 7 is more likely. In addition, it is not counted in determining “current monthly income” in a Chapter 13, which can make your Chapter 13 payment lower. In other words, if you receive social security benefits, you have special treatment in bankruptcy.
In addition, social security benefits which have been segregated (kept separate from all other income) can be exempted under federal law. This is especially important if you have a large amount of equity in your home, or if you own your home free and clear from any mortgage liens. If you are a Texas resident, and have more than $21,625 ($43,250 for a joint filing), you may need to protect your assets using the Texas exemptions. Unlike the federal exemptions and exemptions from certain other states, Texas does not have an exemption for cash or a wildcard exemption (where you can exempt any type of property). If you have kept your social security benefits in a separate account, however, you can use a special federal exemption to protect any social security benefits that you are holding in the bank.
Whether you are considering bankruptcy or not, you should have a special account where your benefits are deposited. Do not put any other funds in that account other than social security. Notify the bank that this is a social security benefit account. Most banks have a form that you sign designating this account as exempt from levy or other collection action. If you are fortunate enough to be able to save some money, save the funds that come from social security since they enjoy this special protection.
Social security benefits are not exempt from certain creditors, however, such as child support, federal tax collection action or student loans. But from most other creditors, these benefits are specially protected. Most people find it easiest to have two bank accounts, a savings and a checking. The social security benefits go into the savings and other income into the checking. They then transfer out of the savings into the checking as needed, but never the other way.
Posted in bankruptcy, chapter 7, social security Tagged exemptions, means test, social security income Leave a comment
The Means Test Gets Meaner for Texans
Qualifying for a Chapter 7 bankruptcy is getting ready to get harder. In a Chapter 7 bankruptcy, if you pass the means test, you are able to file a chapter 7 bankruptcy, and get rid of unsecured debt, such as credit cards and medical bills; or secured debt (if you want to surrender the item). The primary determining factor in the means test is your average monthly household income. The average is figured based on your last 6 months income. This is compared against the median income of a family in your state that has the same number of members. If your income is above the median, you may still pass the means test, depending on what specific expenses you have. But it is more difficult, and your qualification for a chapter 7 bankruptcy may be challenged.
If you are below median though, you generally qualify for a chapter 7 bankruptcy. There are still some challenges that are possible, but they are fewer and it is much simpler to successfully obtain a chapter 7 bankruptcy discharge.
Periodically, the median income figures are revised depending on what the census bureau data shows for median income. With this turbulent economy, and so many families losing jobs and being cut back – wait for it now – median income has fallen for families in Texas! Surprise. Here’s the comparison:
Means Test Median Income Change in 2010
Median income figures used for Means Test have dropped in 2010.
| Family Size | January 2010 | March 2010 | November 2010 | 2010 Change |
|---|---|---|---|---|
| 1 | 38,940 | 38,801 | 37,676 | Down 1,264 |
| 2 | 55,659 | 55,660 | 54,288 | Down 1,371 |
| 3 | 59,222 | 59,011 | 55,534 | Down 3,688 |
| 4 | 66,381 | 66,145 | 64,420 | Down 1,961 |
When the credit card companies pushed the legislation through, it seems maybe they knew what they were doing. When income is rising and times are good, people don’t need to file bankruptcy. When incomes are rapidly falling, bankruptcy may be the only solution. Fortunately, as the new law is being interpreted, special circumstances, such as whether you can afford to make a chapter 13 payment, are being considered.