Tax refunds and bankruptcy

While many people are busy preparing their tax returns, in this post we will focus on the treatment of tax refunds in bankruptcy.

In a Chapter 7 personal bankruptcy, a debtor filing in New York State may exempt up to $5,000 of cash or cash equivalents ($10,000, if the debtor is a married couple filing jointly), if the homestead exemption isn't taken. Accordingly, for a single debtor, if his or her New York State or federal tax refund exceeds $5,000, then the bankruptcy trustee can require the debtor to turnover to the bankruptcy trustee the difference between the tax refund(s) and $5,000.

However, if a debtor files for bankruptcy in June of a given tax year, then the amount of the tax refund would be prorated between the pre–bankruptcy period (the beginning of the tax year through the day before the filing date, which monies would be paid to the bankruptcy trustee for distribution to creditors) and the post–bankruptcy period (the filing date through the end of the tax year, which monies would be retained by the debtor).

If a debtor expects a large tax refund post–bankruptcy filing, he or she could raise the number of withholding allowances or amount withheld to reduce his or her tax refund, or delay the bankruptcy filing until after receipt of the tax refund.

For questions about the complex interplay between taxes and bankruptcy, please contact Jim Shenwick.

Transfers of Property between Spouses after a Spouse has been sued or is Insolvent

At Shenwick & Associates, we often get questions from clients if they may transfer a house from one spouse to another after being sued or prior to a bankruptcy filing:

An upstate bankruptcy court addressed this question and held that such a transfer could be a fraudulent conveyance and set aside. The name of the case was In re Tina M. Panepinto, 12-11230. U.S. Bankruptcy Court, Western District 12-11230

In In re Tina M. Panepinto,  a wife  who was insolvent owned a wholly-exempt homestead (house) free-and-clear, and (without consideration) transferred her half ownership to her husband.  The bankruptcy court held that an existing creditor could sustain an action to set that transfer aside as a fraudulent conveyance under New York State law.

Records show that in 2008, with a bill collector seeking to collect a debt, Panepinto transferred half the ownership of her home to her husband. Four years later, she filed for bankruptcy. Creditors challenged the bankruptcy petition, seeking to set aside the transfer of real property as a fraudulent conveyance under New York Debtor and Creditor Law §273. The Bankruptcy Judge sustained the creditors challenge.

The lesson is that a debtor, prior to transferring ownership in a residence should seek advice from an experienced bankruptcy attorney.  

The Means Test and the Marital Adjustment

In In re Pamela Persaud, case No. 12-43602-CEC, US Bankruptcy Court, EDNY, February 4, 2013 involved the Means Test, the presumption of abuse and what expenses can be deducted in calculating the Means Test. On Line 17 of the Means Test, the Debtor deducted $5,742.19 form the total monthly income as a "marital adjustment", which she claimed is income of her husband that was not regularly contributed for household expenses. The United States Trustee contended that tuition payments for the couples children were household expenses and should have been counted as a Debtor's income in the means test calculation. The Bankruptcy Judge provided that income of a non-filing spouse can be excluded only to the extent it is not regularly contributed to household expenses. An expense paid by the non-debtor spouse will be considered a household expense and thus included in income on the means test, unless the expense is purely personal to the non-debtor spouse. The Debtor's position was that since the tuition was paid for solely by the non-filing husband who was contractually liable, from his separate monies, those expenses should not be considered household expenses. The Bankruptcy Judge disagreed citing section 101(10A)(b) of the Bankruptcy Code which provides that income includes any amount paid by any entity other than the debtor... on a regular basis for the household expenses of the debtor or the debtor' dependents. The Means Test is an extremely complex calculation and debtor's must use extreme care and caution when making those calculations. Jim

Another Case Where a Rent Stabilized Lease was sold by a Bankruptcy Trustee

In re Mary Veronica Santiago-Monteverde No. 11-15494 (JMP) SDNY April 10, 2012,  is another case where a bankruptcy judge in the Southern District of New York held that a bankruptcy trustee was allowed to sell a debtor's rent stabilized lease to her landlord. Ms. Mary Veronica Santiago-Monteverde  lived in the East Village, in New York and after she filed for chapter 7 bankruptcy, her landlord, East 7th Street Development Corp. made an offer to the Bankruptcy Trustee to purchase her interest in the lease. The bankruptcy trustee agreed to sell the lease and the Debtor objected to the sale holding that she was entitled to exempt the value of her rent stabilized lease as a "public assistance benefit" within the meaning of section 282(2) of the New York Debtor and Creditor law. In New York, exempt property in a bankruptcy case is governed by New York State Debtor Creditor law. The bankruptcy judge rejected Ms. Santiago-Monteverde's argument and the rent stabilized lease was sold to the landlord. The bankruptcy judge in his opinion stated that it is undisputed that a rent-stabilized lease is property of the estate and that the Bankruptcy Trustee may assume or reject any executory contract or unexpired lease of the debtor pursuant to section 365 of the Bankruptcy Code.

May I keep the whole life or universal life cash surrender value in a chapter 7 bankruptcy?

Yes

Can my pension money be taken by a creditor or a bankruptcy trustee in a chapter 7 personal bankruptcy?

Pension money that is in a tax qualified pension plan such a Roth or IRA may be kept in a chapter 7 personal bankruptcy, provided that it does not exceed $1,171,650. Pension money is a 401(k), 403(b), SEP or a defined benefit plan, in any amount, is exempt in bankruptcy and may not be taken or seized by a bankuptcy trustee.

Can I keep a car or automobile if I file for chapter 7 personal bankruptcy?

In New York a debtor can file bankruptcy and keep 1 car that has no more than $4,000 of equity. If the car or automobile is new or has a loan, equity is calculated by taking the difference between the value of the car and the outstanding loan against the car. To determine the value of a car, a debtor can get a letter from an automobile dealer appraising the car or use the Kelly Blue book values

How much is the homestead exemption in New York?

The homestead exemption in Kings, Queens, New York, the Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester and Putnam counties is $150,000 per debtor. If a married couple files for bankruptcy and they both own real estate the exemption is $300,000.

How long is a credit counseling certificate good for?

180 days! Accordingly do not take the course if you are not ready to file for personal bankruptcy because 180 days passes you will need to retake it.

How do I rehabilitate my credit after I file for personal bankruptcy?

By saving as much money as possible and by using credit is a responsible way. A debtor should get a securitized credit card after the bankruptcy filing and then charge and repay on that card. After 6 months of using the securitized credit card, call the bank and ask that the credit limit on the securitized credit card be increased and this process will rehabilitate a debtors credit.

Will I lose my credit cards if I file for chapter 7 bankruptcy?

If an individual files for chapter 7 bankruptcy and they owe money on a credit card, then the amount of money owed on the credit card will be discharged in bankruptcy,s but the credit card company will cancel the credit card. If the debtor wants to keep the credit card after the bankruptcy filing, they may reaffirm the debt which will require them to pay the money due on the credit card after the bankruptcy filing. Reaffirmation requires that the debtor file a special form or agreement with the bankruptcy court with the bankruptcy petition. The Debtor's attorney prepares the reaffirmation agreement.

Can a chapter 7 bankruptcy trustee take my Federal or New York State tax refund?

The answer is yes! The amount of cash that is exempt in a chapter 7 personal bankruptcy filing in New York State is $5,000 if the debtor does not own real estate. Accordingly, for a single debtor, if their New York State or Federal tax refund exceed $5,000 then the bankruptcy trustee can require the debtor to turnover to the bankruptcy trustee the difference between the tax refund(s) and $5,000.  However for example if a debtor files for bankruptcy in June of a given year, then the amount of the tax refund would be prorated between the pre bankruptcy period (January through June which monies would be paid to the bankruptcy and the post bankruptcy period (July through December which monies would not be paid to the bankruptcy trustee. If a debtor thought that they may be receiving a large tax refund after their bankruptcy filing, they could also lower their claimed exemptions or withholding to reduce their tax refund

How often can I file chapter 7 bankruptcy?

Once every 8 years.

Are taxes dischargeable in a chapter 7 personal bankruptcy filing?

Trust fund taxes and sales taxes are not dischargeable in bankruptcy. However, federal and state income taxes that meet the following criteria are: 1. The tax year in question is more than 3 years prior to the filing the bankruptcy, 2. the tax has been assessed more than 240 days prior to the bankruptcy, 3. the tax return for the year in question was filed at least more than two years prior the bankruptcy and 4. the tax return is non-fraudulent and there is no showing of willful evasion of payment of a the tax. Discharging taxes in bankruptcy is technical and complex and James H. Shenwick has an LLM in Taxation from New York University Law School and he has discharged many taxes for clients in personal bankruptcy filings. The starting point to determine if taxes are dischargeable in personal bankruptcy is the review of a clients tax transcript which is obtained from the IRS.

Does a personal bankruptcy filing stop all lawsuits against a debtor?

A person who owes money is know as a debtor. A creditor seeking to collect money under New York law generally has 3 remedies. The first is garnishing 10% of a debtor's paycheck, the second is liening and levying on the debtor's bank account, checking account or brokerage account and the third is docketing a judgment against real estate to prevent the debtor from selling or refinancing the real estate. A personal bankruptcy filing will stop all lawsuits and prevent garnishment, liens and levies and the docketing of judgments against real estate pursuant to section 362 of the bankruptcy code.

What documents must a debtor bring to the meeting of creditors?

The meeting of creditors or 341 meeting, is schedule approximately 30 days after a debtor files for bankruptcy. At that meeting the debtor must bring their social security card and a photo id which shows a New York address.

What are the differences between chapter 7 and chapter 13 personal bankruptcy?

Chapter 7 bankruptcy is known as "liquidation and fresh start". The chapter 7 bankruptcy is required to sell non-exempt assets in a chapter 7 bankruptcy and distribute those monies to creditors. Non-exempt assets could be a house, coop or condominium with more than $150,000 of equity for single debtor, a car with more than $4,000 of equity or a business that a debtor wants to keep. Accordingly if a debtor has a non-exempt asset which they want to keep after a bankruptcy filing they would need to file chapter 13 bankruptcy not chapter 7.

Why is chapter 13 personal bankruptcy more expensive than chapter 7 personal bankruptcy?

In a chapter 13 bankruptcy, besides meeting with a client, attending the 341 meeting (that is the meeting with the bankruptcy trustee) there are 2 additional steps. The attorney for the Debtor must prepare and file with the Bankruptcy Court a chapter 13 plan and attend the hearing on plan confirmation. In a chapter 7 bankruptcy a plan is not drafted and filed with the Court and there is no hearing on plan confirmation so the legal fees for chapter 7 bankruptcy are less than for a chapter 13 bankruptcy.

How much does chapter 13 bankruptcy cost?

There are 3 costs or expenses in filing chapter 13 bankruptcy. The first cost is the filing fee which is presently  $281. The second cost is for credit counseling and debtor education is $40 at www.DebtorWise.org. The third cost is legal fees which cost approximately $5,000 in New York City. After the initial consultation Shenwick & Associates provides the client with a written estimate of these costs.

How much does it cost to file chapter 7 personal bankruptcy?

In New York City there are 3 costs or expenses in filing chapter 7 bankruptcy: 1. The first cost is the filing fee which is presently $306. 2. The second cost is for credit counseling and debtor education which costs $40 at DebtorWise.org and 3. The third cost are the legal fees. For a simple bankruptcy the legal fees are $2,000 to $2,500 and for a more complex personal bankruptcy the legal fees are $4,000 to $5,000. After the initial consultation, Shenwick & Associates provides all clients with a written quote for the cost of legal fees.