341 Hearing 2/10 My scenario & Questions

[bksmith12345]

Hi All,

Wife and I filed 13 on 12/31/08. 341 meeting on 2/10/09. We live in New Jersey. Proposed plan 60 months @ $320. This includes 2 months 1st mortgage arrears, 4th quarter property taxes, 2 payments truck, 1 payment car and cram down of John Deere X585 tractor.

Doing a lien strip on second mortgage of $75K. Flushing $160 unsecured. Dropping interest rate on vehicles to 6%.

We get a tax refund of appox. 12K each year. Its a forced savings we've been doing. The attorney has divided that by 12 to give us $1000 income each month. This way our net income equals our expenses.The way it is set up $0 is going to unsecured.

My question is will this fly? The trustee is XXXXXXX in Newark. In case anyone has dealt with them. I've read conflicting things about tax returns. Some say the trustee will grab the refund. My attorney says we can devide it up to show as income. Can we really cram down the John Deere? We she think that is silly? I do have 2.5 acres of grass to cut. My attorney assures me that this is doable. I just think this sounds all to easy.

I would appreciate any input and opinions. Thanks.

[AngelinaCat]

Hi bksmith12345, welcome to the forum.

I see you are on the board. Please go into 'edit' mode and XXXXX out the name of your trustee, or remove the entire sentance. We do not use people's real names here.

The 'edit' button is on the lower right of your window, next to the 'quote' button.

Thank you

[bksmith12345]

Hi,
Sorry about that. Thanks for the welcome.

[AngelinaCat]

Thanks!

[justbroke]

My question is will this fly? The trustee is XXXXXXX in Newark. In case anyone has dealt with them. I've read conflicting things about tax returns. Some say the trustee will grab the refund. My attorney says we can devide it up to show as income.

Your BEST bet is to change your withholdings so that the money IS part of your income. Be very very careful with Trustees and tax refunds.

They believe that if you can live all year with that money being withheld, then you don't need it when the refund is due!!!!! Ask your lawyer this... "have you personally done this on other cases and did it work?" Remember, it will be you losing $12K not him. If he says it will work counter with just changing the deductions, or asking him if he'll cover your losses.

I would change your strategy, immediately!!!

Can we really cram down the John Deere? We she think that is silly? I do have 2.5 acres of grass to cut. My attorney assures me that this is doable. I just think this sounds all to easy.

Yes, you can cram it down. But, there's a caveat. You must have purchased it more than 910 days (2.5 years) ago!

P.S. I'm not a lawyer nor am I a paralegal or anysuch legal eagle. However, my opinion is based on more than 300 cases that I have personally researched.

[bksmith12345]

He says it will work. I hope he is right. I aslso asked him if I should change my witholding and he said no. I never asked him if he has done this before. I guess I should. I have had the John Deere for over 910 days. So all good there. Thanks for the input.

[justbroke]

He says it will work. I hope he is right. I aslso asked him if I should change my witholding and he said no. I never asked him if he has done this before.

This would not fly in my District. They would take the entire refund and give it to the unsecured creditors. Be very very wary if this hasn't passed that particular Trustee's desk before.

I always err on the side of caution.

[bksmith12345]

I just re-read an email from my attorney in which I asked him about the trustee taking the tax refund. He replied that it is exempt from creditors under 522(d)(5). I'm going to lok this up. Man, I hope he is right.

[justbroke]

I just re-read an email from my attorney in which I asked him about the trustee taking the tax refund. He replied that it is exempt from creditors under 522(d)(5). I'm going to lok this up. Man, I hope he is right.

Ummm... exemptions are a one shot deal. The paragraph you refer to is 11 USC 522 which is all about exemptions.

Specifically 11 USC 522(d)(5) reads... "[t]he debtor's aggregate interest in any property, not to exceed in value $1,075. plus up to $10,125 of any unused amount of the exemption provided under paragraph (1) of this subsection.". (I made corrections to this to make it fit for this year.)

Three things. First, you would have to be in a State which allows the Federal Exemptions. Second, you would have had to have opted to use the Federal Exemptions over that particular State's exemptions (unless you moved a bunch before filing and you're in that twilight zone... that's a different issue). Third, your Schedule C would show your "anticipated tax refund for 2008" and list 11 USC 522(d)(5) as the basis.

Now, I'll say that this value of this particular exemption (11 USC 522(d)(5)) is only $1,075, plus up to $10,125 of the unused portion of the homestead exemption. So if you claimed a homestead exemption... some or most of that $10K "up to" value is gone.

Then, I'll say that this is a one shot deal, and not annually.

Then, I'll say if you applied, say $8,000 of that 522(d)(5) to this tax refund, then the other $4K goes to the Trustee (unsecured creditors). Oh, but wait... that's only for your 2008 taxes. Every year after that, you will have to surrender the entire Tax Refund (unless exempt by your State, but since you're using the Federal Exemptions, they don't allow this, so my exception is moot).

You understand my concern? You may just be okay this year (2008 taxes), but 2009, 2010, 2011, and so on... you are exposed.

[bksmith12345]

Oh boy! I just shot my attorney an email. If that is the case why would he tell me not to change my witholding? When I hear from him I'll let you know.

[justbroke]

Oh boy! I just shot my attorney an email. If that is the case why would he tell me not to change my witholding? When I hear from him I'll let you know.

Probably for "this year" you dont' need to change it if your Schedule C shows the Exemption of the anticipated tax refund.

Some Trustees scrutinize tax returns. If they see that your tax return is $12,000 they could argue that you aren't committing all of your disposable monthly income into the plan, and keep it. For your 2008 return, you are probably okay if you exempted it in the schedules. I assume your lawyer did this correctly as he mentioned 11 USC 522(d)(5) as the basis for the exemption.

As for future years, I just don't see this as a winning strategy. You no longer have the exemption. Now, you could argue that you factored it into your income, but any good Trustee wouldn't care. They'd drag you into court with a Motion to Modify Confirmed Plan and actually increase your payments.

The keyword here is and will continue to be disposable monthly income. As an example, let's make up a scenario.

Let's say that your monthly gross income is $12,000 (and $1,000 of it is from your phantom tax refund). Let's say your allowable expenses add up to $3,000 a month (not including secured debt payment like house, cars). Let's say that during the year the IRS withholds $12,000 total.

When the Trustee sees your $12K return, they'll think... free money. Here's why. You lived without that $1,000/month ($12k/12 months), so your actual expenses are $2,000 not the $3,000 you listed on your Form B22C. That means, that you can live on $2K a month.

So the Trustee will want to increase your payments by $1K a month, since you "obviously" have more disposable income than you put on your forms. This will especially be easy for the Trustee to prove if you are below median income, and your payments are calculated based on Schedules I & J and not Form B22C.

You could argue that the $1K/month is actually your non-disposable income, but the fact that you didn't have it in your hands over the year, could bring this argument up.

I don't know how you "added" the refund as income. Your income is your income. So, if you make $144K/year (based on my magic $12K/month scenario), then your income is not $144K + $12K refund! It's $144K.

For some reason, I just don't see this plan working (passing the Trustee's sniff test). A tax refund is not income. A tax refund is a return of over-collected tax obligations from your income (earned or un-earned), or residual from refundable tax credits. The more I read this and re-read your initial post (with only a $320 payment and nothing to unsecured creditors), the more I'm concerned about the Trustee objecting to your plan as a plan submitted in bad faith,

(Please note that this scenario is just me thinking out loud. I am not a lawyer and your lawyer knows a lot more about your particular District and Judge and Trustee... I hope. Does this lawyer only specialize in Chapter 13 cases?)

Adding that since you stripped a 2nd, you have no equity, so you didn't use the Homestead Exemption, so the entire $10,125 unused homestead wildcard is available to you, in 2008.

[bksmith12345]

Yes, he specializes in 13 cases. When we did our income and expenses meeting with him he used the 12K divided by 12 months and added it to our income. I gather he did this so our income matched our expenses. I have not heard back from him yet. Still waiting.

Are you saying we might get to keep this years refund? Then we would have to surrender it the following years. Also, would we only get to keep 10K and give up the rest? Thanks

[bksmith12345]

Hi,

What is a homestead wildcard?

Thanks

[justbroke]

Hi,

What is a homestead wildcard?

Almost all States have a Bankruptcy Exemption known as the Homestead Exemption. This is used to protect some (or all, in Florida, for example) of your equity in your homestead (primary residence).

In a percentage of those states, any unused portion of your homestead exemption, can be used as a general "personal" property exemption. The "personal" property exemption can be used for a variety of things from cash to other real estate, cars, furnishings... anything owned by the debtor. This is known as a wildcard exemption.

[bksmith12345]

Thanks for all your replies justbroke. Much appreciated. I'm getting a concerned now. Especially the trustee considering the plan to be in bad faith. Our attorney seems like a pretty sharp guy that knows the ropes. Why would he submit a plan that might be considered in bad faith. Is he just fishing to see what he can get away with and will submit a modified plan if the trustee says no.

Is it possible we could appear at the 341 and the trustee jusy says flat out no way and dismiss?

Thanks