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Just found out about forfeiture of tax refunds - kind of a deal breaker for Chapter 7

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  • Just found out about forfeiture of tax refunds - kind of a deal breaker for Chapter 7

    I'm filing pro se - single debtor, single income with 4 children. I have an old debt that has come back to haunt me, and the creditor were quickly granted wage garnishment through the courts. The original debt was around $9k, but has since skyrocketed up to almost $20k. My tax refunds are usually pretty good because I don't claim a lot of exemptions. After listening in to 341 hearings today, I found out that I will have to forfeit both state and federal tax refunds. (Seriously, how did I miss this information before now??) I have two questions: Since I know creditors buy debts for dirt cheap, what are the chances I'd be able to work out a deal with the creditor for a buyout/payoff after I get my tax refund? Also, if I back out of the chapter 7, will I be allowed to, and will it leave a 'filed bankruptcy' mark on my credit?

  • #2
    Depending on where you are filing and the amount you expect to receive in tax refunds, you may be able to exempt you tax refunds. You should schedule a free consult with some attorneys to see what they say about your situation.

    It is unclear if you have already filed, so hard to say what your options are at the moment.
    Case Closed > 2/08/2010

    Comment


    • #3
      Originally posted by icanteven View Post
      Also, if I back out of the chapter 7, will I be allowed to, and will it leave a 'filed bankruptcy' mark on my credit?
      Technically, you can't "back out" of a Chapter 7. The Trustee is in total control of your assets once you file and certainly would not allow a case to dismiss if they determine that there are juicy assets, I mean assets that can be liquidated for the creditors. You could always convert to a Chapter 13, but that may not be in your best interest either.

      Like BobMango, I don't know if you filed or not. If you have not filed there is nothing preventing you from trying to negotiate with any creditor. The question is, why would a creditor negotiate when they are getting wage garnishments at 25% of your salary?

      If you're in a Chapter 7, the best is to just think about this. Your Chapter 7 will discharge that $20K debt and remove the garnishment. If your refund is typically $5-7K, you just "settled" for less than $0.35 on the dollar (or less). If there are other debts, then you would have technically settled for even less.

      Chapter 7 bankruptcy remains on your credit report for 10 years (from filing) regardless of outcome. Chapter 13 bankruptcy remains on your credit report for 7 years (from filing) if your case is not dismissed; 10 years for other outcomes (including dismissal).
      Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
      Status: (Auto) Discharged and Closed! 5/10
      Visit My BKForum Blog: justbroke's Blog


      I am not an attorney. Any advice provided is not legal advice.

      Comment


      • #4
        Thank you both for responding - both of your responses were very helpful. I have filed Chapter 7, as of last Tuesday. I did the 'emergency' filing, because of the garnishment that was starting with my next paycheck. I was thinking that I could work something out with the creditor/law firm using the intent to file bankruptcy as leverage to work out a lower payoff and keep a portion of my tax refund, and not have a BK on my record for the next 10 years. The more I think about it, the more I believe the creditor/law firm anticipated that I would file ch7 in hopes of getting my tax refund. It really bothers me that I'm powerless to do anything to keep any of my tax refund.

        Comment


        • #5
          People threaten to file bankruptcy all the time. The key is that unless and until you actually file, it means nothing. A smart creditor, learning that you are about to file, will "run" to the courthouse steps to be the first to obtain a judgement and then to file that judgement to make it a secured judgement. When the judgement is reduced to a money value and secured, that makes it a little more painful to deal with.

          First, you're not powerless on the tax refund. First, you can use exemptions to cover all or a portion of the tax refund... if you have available exemptions in your State to cover all or a portion of a tax refund. Additionally, any portion of the tax refund attributable specifically to any child tax credit (a certain part of the tax code) is not attachable by creditors and is also exempt (Trustee can't claw at it).

          So you have homework and that is to figure out your exemptions. If you're lucky, have no house or major property other than an anticipated refund check, and you are in a State that allows the use of the Federal Exemption scheme (or California System II), then you could very well protect a major portion of the tax refund. It all depends on what type of property you have and want to save or protect.

          Do you have a guide book such as Nolo's Guide on How-To File for Chapter 7 Bankruptcy?
          Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
          Status: (Auto) Discharged and Closed! 5/10
          Visit My BKForum Blog: justbroke's Blog


          I am not an attorney. Any advice provided is not legal advice.

          Comment


          • #6
            I live in Arizona. From what I've found because I don't own my own home, I can claim up to $2000 in cash or in a bank account. Of course, I haven't filed for 2017 yet, so I can't claim it beforehand. Having the child tax credit stay with us will be helpful. Most of my property is of little value. I just took out an auto loan on one vehicle (8 payments in and plan to reaffirm), and my vehicle that I commute with is worth less than $1000. No art, coin collections, baseball cards, etc.

            I have the NOLO book on reserve at the library, may end up having to get the ebook.

            Comment


            • #7
              Arizona is stingy on cash (which a tax refund would be a cash equivalent). Arizona may be one of only a few States that don't allow use of the federal tax exemptions and also do not protect the earned income tax creditor or the child tax credit.
              Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
              Status: (Auto) Discharged and Closed! 5/10
              Visit My BKForum Blog: justbroke's Blog


              I am not an attorney. Any advice provided is not legal advice.

              Comment


              • #8
                Originally posted by justbroke View Post
                Arizona is stingy on cash (which a tax refund would be a cash equivalent). Arizona may be one of only a few States that don't allow use of the federal tax exemptions and also do not protect the earned income tax creditor or the child tax credit.
                Thanks again, justbroke. Can you tell me where you found the information about the tax credit forfeiture in Arizona? I have found mixed information on several websites. I was able to get my hands on the pdf (digital) copy of the NOLO How To File for Chapter 7 Bankruptcy book. It looks like this is definitely one of the questions I'll have to ask an attorney.

                Comment


                • #9
                  I just looked at the exemptions for Arizona. In my State of Florida -- yeah, that notoriously bad State at counting things -- as a specific exemption in F.S. 222.25(3) (from memory and may be wrong).

                  Local Arizona attorneys may be more up to the topic of EITC (earned income tax credit) and CTC (child tax credit) specifically for Arid-zona. I'm not sure if despritfreya is around.
                  Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
                  Status: (Auto) Discharged and Closed! 5/10
                  Visit My BKForum Blog: justbroke's Blog


                  I am not an attorney. Any advice provided is not legal advice.

                  Comment


                  • #10
                    Originally posted by justbroke View Post
                    Local Arizona attorneys may be more up to the topic of EITC (earned income tax credit) and CTC (child tax credit) specifically for Arid-zona. I'm not sure if despritfreya is around.
                    I have not been "following" this thread but I will review this evening. In the meantime, if the issue is whether or not any part of a tax refund is exempt under Arizona law, the answer is "no". The refund must be turned over if the trustee requests it. The Trustee will then return to the debtor any portion of the refund that is not "property of the estate" (the pro rata share that represents post petition months - in the context of a Chapter 7).

                    Des.

                    Comment


                    • #11
                      Originally posted by despritfreya View Post

                      I have not been "following" this thread but I will review this evening. In the meantime, if the issue is whether or not any part of a tax refund is exempt under Arizona law, the answer is "no". The refund must be turned over if the trustee requests it. The Trustee will then return to the debtor any portion of the refund that is not "property of the estate" (the pro rata share that represents post petition months - in the context of a Chapter 7).

                      Des.
                      Since I filed in November, that means they'll keep around 92% of the refund? Initially, I was intending on keeping one of my credit card accounts because it's a manageable balance and helps to build my credit back up, but since it is unsecured, I wonder if I should just let it go as well.

                      Comment


                      • #12
                        Originally posted by icanteven View Post
                        Since I filed in November, that means they'll keep around 92% of the refund?
                        Yes - if a turnover is required by your Trustee.

                        Originally posted by icanteven View Post
                        Initially, I was intending on keeping one of my credit card accounts because it's a manageable balance and helps to build my credit back up, but since it is unsecured, I wonder if I should just let it go as well.
                        You will not be "reaffirming" that credit card since no judge in Arizona is going to approve it. You can voluntarily repay any creditor you wish however the credit card company is unlikely to keep the account open and is even less likely to report future payment/use to the credit bureaus.

                        Des.

                        Comment


                        • #13
                          Originally posted by icanteven View Post
                          I was intending on keeping one of my credit card accounts because it's a manageable balance and helps to build my credit back up, but since it is unsecured, I wonder if I should just let it go as well.
                          It's likely no help at all. It will still show as IIB with a $0 balance. No bank/creditor in their right mind would keep it as open and report once it has been discharged; even if you begged them to do so. In my opinion, you would be flushing money down the toilet. The best way to rebuild your credit, is to start with a new credit foundation.

                          Thank you despritfreya . I thought Florida was stingy, but at least we get to keep certain IRS credits.
                          Last edited by justbroke; 11-24-2018, 12:00 AM.
                          Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
                          Status: (Auto) Discharged and Closed! 5/10
                          Visit My BKForum Blog: justbroke's Blog


                          I am not an attorney. Any advice provided is not legal advice.

                          Comment


                          • #14
                            Thanks for the information despritfreya and justbroke. I believe I have gotten through all of the schedules and documents for filing, and I'm now working with the trustee to get them all of the information they need.

                            One of the things I'm curious about is that my commuter vehicle is in pretty bad shape with 215k on the odometer, a salvage title, hail damage, cracked windshield and transmission is going out. In fact, NADA and KBB value it between 500-650 without considering the salvage title. I didn't exempt it because I opted for including the newer vehicle I just financed this year and have only made around 10 payments on it, so the equity is around $1500.

                            How likely is it that I could run into problems with exempting the new vehicle, and the risk of the trustee taking the commuter car?

                            Comment


                            • #15
                              my commuter vehicle is in pretty bad shape. . .KBB value it between 500-650 without considering the salvage title. . How likely is it that I could run into problems with exempting the new vehicle, and the risk of the trustee taking the commuter car?
                              There should be no problem with the exemption you claimed in the newer vehicle. As to the other one. . .

                              You are in Arizona - correct? Please give me your Trustee's initials.

                              Des.

                              Comment

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