Chapter 7, married filing single, possible tax refund

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My husband is self-employed, and last year was a rough year (hence part of the reason I'm filing!).

Anyway, I was roughing in our taxes for 2010, and as we thought, we will likely be due a refund -- about 4k or so from feds, and around $900 from state. Our plan has been to apply that to 2011's estimated taxes, so we would not be getting an actual refund check.

My question is -- can we do that, or will it be something that the trustee would go after? We haven't filed yet; usually we do in October with the extension. Not sure what we will do this year. I estimate that my 341 will take place in February. Probably late February at this rate. If we do wind up filing in October, would the refund be "protected" in that way, due to length of time from 341?

[justbroke]

A smart Trustee should still go after it. They will clearly see from your tax return that you were entitled to a refund, but deferred it to the next tax year. An overwithholding is still income, even if you apply it forward to another tax year.

Also, specific to filing a bankruptcy, you are not allowed to file an extension. All years in which a tax return are/were due must be filed before you can be granted a discharge. This is specifically so that government interests are protected inasmuch it is to prevent debtors from hiding overwithholdings in unfiled tax situations. Whether the Trustee picks up on this or not, is not something I can predict. However, it is tax season, and Trustees are highly aware of this and many attorneys call this Open Season or Hunting Season when it comes to tax refunds. It's easy pickings for the Trustee to earn a commission and distribute something to the unsecured creditors.

I did look at Oregon real quick, and Federal exemptions are not available, there is no wildcard, and there is no unused homestead exemption. Whether the anticipated refund would count as "cash in banks" -- for the $7,500 exemption -- would be a question of law.

However, from what I've read and what I understand about the exemption scheme in Oregon, you shouldn't file if you're expecting a large refund and you want to use it! It will be taken in almost every single case!

Have you even mentioned this to your attorney? I mean, have you told him/her that you want to hide this asset by applying it forward to keep it out of reach of the Trustee?

You may want to actually work with your attorney to find another means to obtain your refund first, and then spend it down before filing. On first read, it appears as though you know the refund is in jeopardy and want to hide it from the Trustee. Do not do that. I don't want to read about another discharge being denied and case dismissed with prejudice.

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Hm. It wasn't a case of over-withholding, I'll tell you that. We/my husband pay estimated taxes quarterly for his business. We paid throughout 2010, and as the end of the year approached we realized that it would be a different situation for 2010's taxes. For the first time *ever* we probably qualify for the Earned Income Credit. Every year previous to this we have owed both federal and state taxes with the return and have never received the EIC.

Would your suggestion then be to hold off on filing BK until our tax return is filed, anticipated refund received, and distributed to federal and state tax agencies, pay utilities, that type of thing? Keeping receipts for how it is spent, of course.

How long can the trustee "come after" any monies received, after the discharge?

[justbroke]

Hm. It wasn't a case of over-withholding,

Overwitholding and over-paying estimated tax are treated the same. Overpaying estimated tax is still a form of over-withholding.

I'll tell you that. We/my husband pay estimated taxes quarterly for his business. We paid throughout 2010, and as the end of the year approached we realized that it would be a different situation for 2010's taxes. For the first time *ever* we probably qualify for the Earned Income Credit. Every year previous to this we have owed both federal and state taxes with the return and have never received the EIC.

Earned Income Credit (EIC) is not subject to the Trustee's reach and is considered exempt.

Would your suggestion then be to hold off on filing BK until our tax return is filed, anticipated refund received, and distributed to federal and state tax agencies, pay utilities, that type of thing? Keeping receipts for how it is spent, of course.

Yes, that's how I view it. Of course, a competent attorney that has seen the full details of your financial situation can make a more informed decision. Based on the information that you provided, it would be unwise to file for Bankruptcy now and then file your taxes after. The Trustee may see this as an opportunity to make you an asset case. (Although I'm not sure if you're not already an asset case due to the limited information that is here in the thread.)

How long can the trustee "come after" any monies received, after the discharge?

If you are declared an asset case? For years. The Trustee can wait for money, even from a lawsuit or inheritance that goes through probate after the discharge, for a very long time! However, it requires the case to be declared an asset case prior to the case closing (not the case being discharged). The Trustee can also re-open the case to administer assets if they discover that there were assets that should have been administered but were not known at the time. Actually, I think that 11 USC 554 allows the case to be re-opened at ANY TIME after closing, to administer "unadministered" assets!

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I don't think I'm an asset case....we have just our house (which is owned by both of us, and the equity in it is protected unless they assign me 100% of the equity, which I doubt. Something about tenancy by the entireties in Oregon). We also have 2 cars, a 2003 and a 2007. Both are in my husband's name only; his truck would be a "tool of the trade" for him I believe, and we have no equity in the minivan. No other properties, non-exempt jewelry, toys (snowmobiles, boats, etc), no stocks/bonds, etc etc. It's things of that nature that make someone an asset case, correct? Just us and our 4 kids. And 3 cats ;-)

So if I'm a non-asset case, then how long does the trustee have? Or is it done at discharge? For instance, say a relative passed away and left me $10,000 that I get after the discharge. Is that mine, or can the trustee get it? (No that hasn't happened and I don't anticipate it happening, just stuff that pops into my head. What if my non-filing spouse has that scenario? What if we win the lottery after discharge? Things like that. I think too much LOL)

I'm going to email my attorney tonight and hope he can get back to me tomorrow. That way we can get started on taxes now, if need be. Thank you for the info.

[NewPage]

Overwitholding and over-paying estimated tax are treated the same. Overpaying estimated tax is still a form of over-withholding.

Yeah, I wish my husband had been a bit more conservative with his estimated tax payments last year. I think he was hopeful business would pick up, plus we have been stung by under-payment penalties many times over the years, so he was trying to be sure it wasn't going to happen for 2010.

[justbroke]

So if I'm a non-asset case, then how long does the trustee have? Or is it done at discharge? For instance, say a relative passed away and left me $10,000 that I get after the discharge. Is that mine, or can the trustee get it? (No that hasn't happened and I don't anticipate it happening, just stuff that pops into my head. What if my non-filing spouse has that scenario? What if we win the lottery after discharge? Things like that. I think too much LOL)

First, despite what you read on the Internet, winning the lottery does not count! According to the Bankruptcy code and caselaw, the only thing that is subject to the Trustee's reach post-petition (after you file) is an inheritance , death benefits from a life insurance policy, or property related to a dissolution of marriage, that you become entitled to receive within 180 days of filing (regardless of whether you actually receive payment in that 180 days!). Nowhere does it mention lottery! So go win the lottery if you like!

The Trustee has actually FOREVER if there were unadministered assets that the Trustee or debtor did not know about at the time the case was filed! While this hardly ever happens in cases involving individuals, it is common in business bankruptcies since you really can't discharge debt in a business bankruptcy... it's only liquidated. For example, say that you didn't know that you were entitled to an inheritance but 3 years later, some attorney finds you and tells you that your great-uncle from Romania died 3 years ago and they've been trying to find his relatives, and you are the last surviving relative. Guess what? That inheritance is part of the bankruptcy estate by definition and is within the reach of the Trustee to administer the assets! Yes, it's a stretch, but it does happen... at least the inheritance part!

I'm going to email my attorney tonight and hope he can get back to me tomorrow. That way we can get started on taxes now, if need be. Thank you for the info.

Great idea. Definitely see how your attorney wants to deal with it. Be as specific as possible and mention how you normally file in October, based on an extension, and that you are expecting thousands back.

Yeah, I wish my husband had been a bit more conservative with his estimated tax payments last year. I think he was hopeful business would pick up, plus we have been stung by under-payment penalties many times over the years, so he was trying to be sure it wasn't going to happen for 2010.

I understand precisely how you got to having too much estimated tax paid in 2010! We all wish we could get the amount down to the penny, but the underpayment penalty is just too punitive to mess up.

[tcreegan]

Hi NewPage,

You're in the 9th Circuit, not too friendly to debtors...they have ruled that you can't apply the refund to next years taxes, it belongs to the BK estate.

Federal BK code says you have to have the tax return in the hands of the trustee at least 1 week before the 341 meeting. The only exception I have seen is something "beyond the control of the debtor" ...don't think that covers a routine extension.

Extensions won't keep it out of the trustees hands anyhow, at the 341 the trustee usually asks about tax refunds and if someone hasn't filed yet they rule you an asset case and keep the case open till they get it.

BUT...the good news for you is the $7,500 Oregon exemption for cash on hand. File taxes ASAP, get the refund in the bank, then file BK and use the exemption to protect the cash. If that is not workable, ask your attorney if the exemption can cover an anticipated refund.

Good luck with this, hope you can keep the refund to fund your new post-BK life !

Tom in Colo

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According to the Bankruptcy code and caselaw, the only thing that is subject to the Trustee's reach post-petition (after you file) is an inheritance , death benefits from a life insurance policy, or property related to a dissolution of marriage, that you become entitled to receive within 180 days of filing (regardless of whether you actually receive payment in that 180 days!). Nowhere does it mention lottery! So go win the lottery if you like!

The Trustee has actually FOREVER if there were unadministered assets that the Trustee or debtor did not know about at the time the case was filed! While this hardly ever happens in cases involving individuals, it is common in business bankruptcies since you really can't discharge debt in a business bankruptcy... it's only liquidated. For example, say that you didn't know that you were entitled to an inheritance but 3 years later, some attorney finds you and tells you that your great-uncle from Romania died 3 years ago and they've been trying to find his relatives, and you are the last surviving relative. Guess what? That inheritance is part of the bankruptcy estate by definition and is within the reach of the Trustee to administer the assets! Yes, it's a stretch, but it does happen... at least the inheritance part!

I wish I could win the lottery! (Me and a zillion other people, right? LOL)

Okay, so not Romania, but Hungary ;-). My non-filing husband's family is from there. What if he finds out at some point that *he* has an inheritance coming? ("Mr. NewPage, Congratulations! You have inherited $50,000 from your Aunt Zelda who died in a tragic paddle-ball accident, here's a check.") Is that his alone? Or ours? (Oregon is not community property I know). Can the trustee have that?

My hubby, love him to pieces, but he plays the "what if" game a lot and I think it's catching LOL

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This is the response from my attorney today:

If you do not file a bankruptcy the Discover suit will proceed. I have not yet seen the complaint, but I assume it is a lawsuit to collect on a delinquent credit card account? I also assume you have no defenses to their claim? If my assumptions are correct Discover will obtain a judgment and at some point attempt to garnish wages or bank accounts. I can not tell you when that will occur, but it typically takes weeks, if not months, before a judgment creditor gets around to garnishing you.

As of now, your 2010 tax return (whether you have the money in hand or have not yet filed) is a monetary asset of your bankruptcy estate. We might be able to exempt a small amount of it if you file the bankruptcy now, but much of that $4,300 would go to the trustee and he would distribute it to your creditors. Yes, you can take the money before you file bankruptcy and use it for your regular expenses. The trustee can get it back though if you use more than a few hundred dollars of it to pay unsecured creditors (eg. credit card bill) or insiders (eg. family members). Such a payment is called a “preferential transfer” and the trustee has the authority to demand the money back from the creditors. But using it for the taxes and expenses like you suggest should be fine.

The decision is yours. If you file bankruptcy now you will likely lose most of your tax return. If you wait and file later, you risk that Discover and other creditors will collect the debts you owe them.

I'm more than a little irritated that he hasn't seen the papers from Discover yet. I was served on December 27th and faxed to their office on December 28. I thought I was making a good decision to go with this lawyer but his paralegal is really ticking me off.

I'm assuming that if I don't respond to Discover by the time the stated 30 days is up, they receive a default judgment in their favor. I am not employed, so have no wages to garnish. I have a checking and savings account in my name, neither of which have much in them and no likelihood of having anything significant added to them. If Discover receives a default judgment, will that be discharged in the bankruptcy when it is filed?

At this time I have no notice of suits from any other creditors.

Help!

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I already know I can't take the refund and pay a creditor. It would be used to pay quarterly taxes and maybe pay ahead (can you do that?) on a things like say the garbage bill or the water/sewer bill, things like that. But primarily it would be for paying the first quarter of 2011's federal and state taxes.

[tobee43]

newpage....can you ask your atty even IF discover card does successfully obtain a judgment prior to your filing; if you cannot file a motion to vacate after your discharge???? unless it's different in your state...but most times, with a few exceptions, even if a judgment was granted you can get them removed.

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I'm writing the response email now:

Yes, the Discover suit is to collect on a delinquent credit card. I'm assuming that if I don't respond by the time the stated 30 days is up, they receive a default judgment in their favor. I am not employed, so have no wages to garnish. I have a checking and savings account in my name, neither of which have much in them and no likelihood of having anything significant added to them. If Discover receives a default judgment, will that be discharged in the bankruptcy when it is filed?

At this time I have no notice of suits from any other creditors.

I'm going to discuss filing the tax return immediately with my husband, and let you know our decision. I'm assuming then that my petition would be put on a back burner, so to speak, until the refunds are received and disbursed to federal and state tax entities? I understand that using the refunds would need to be very carefully documented to show exactly where every cent went.

If we file taxes now and receive and pay out the refund amounts in February, is there any issue with paying the first quarter's estimated taxes before the April 15, 2011 due date? What I'm thinking is that we would go with the above scenario, and then after tax payments are sent (hopefully in February), to go ahead and file the bankruptcy.

Opinions? Would it be okay to pay taxes prior to their due date? Is that a big deal? Usually Turbo Tax says "pay xxxx" for each quarter, so we'd pay whatever that amount is to federal and state, and then if there was any left we'd pay some utilities or something.

[october99]

If your spouse is not filing bk with you then wouldn't 1/2 of the refund be his and therefore off-limits? That's how other assets would work, so I'm confused why it isn't the same with the tax refund.

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I wondered that myself.