Income taxes

[Scottowl]

This is the first year for me to file while in Ch13. Is there anything for me to be aware of?
I usually use TaxAct, if not filling the form by hand. Would it make sense to see a tax professional?

Also, near as I can tell, I will owe the IRS about 4-5k after filing in April. At first I thought about a 401k withdrawal(I'm 61, so no age penalty).

I could also look into a 401k loan, but there is the cost of repayment.

My only other option, as I do not have anywhere near the amount owed, would be to go back on an IRS repayment plan. Is that allowable?

What would be the best course to pursue?

The reason for this problem is severe under withholding (single, no dependents claiming 6 dependents) clear through September. I now claim at the proper single/zero dependent rate, and don't anticipate future problems.

[StuckinaRut]

The IRS wouldn't allow me to go on a payment plan, nor would they file a claim for the taxes owed. My lawyer told me to send them payments. I have made payments periodically through IRS Direct Pay without issue and will pay them off when I no longer have to send payments to the trustee (last payment is in April).

[Scottowl]

Did you make payments each month, or was it more sporadic?
I wonder if this is normally what IRS does?
If so, Would any refund in later years go to this tax debt and not back to the trustee? Obviously there would be no refund if IRS applied it to the debt.

[justbroke]

Did you make payments each month, or was it more sporadic?
I wonder if this is normally what IRS does?
If so, Would any refund in later years go to this tax debt and not back to the trustee? Obviously there would be no refund if IRS applied it to the debt.

If you are in a Chapter 13 and had back taxes included in the Chapter 13, the IRS cannot intercept any future tax refunds to pay for those included in the Chapter 13 plan. I received refunds even though I owed the IRS back taxes; however, my pre-filing taxes were included in my plan and were being paid.

Unfortunately, falling behind in taxes after filing can not only get you in trouble with the IRS, but also the Trustee. Keeping your taxes from becoming past due is normally a condition of confirmation (and is a line item in many plans).

If you owe in a year after filing and during your plan, you pay the IRS. It's better to pay as much as you can by April 15th and pay the rest by September/October. Generally the IRS won't bother you until October or later.

[Scottowl]

JB, considering that, what ramifications would be involved in a 401k withdrawal for this purpose?

My choice would be to do that, and be done with it, unless there is a risk of derailing my Ch13 plan, or jeopardizing my ability to continue making contributions to the 401k .

[justbroke]

Scottowl I would only suggest reviewing this with your attorney. One of the issues is that, unless you fall under one of the exceptions, you will be hit with ordinary income tax plus a 10% penalty.

[flashoflight]

The 401k withdraw is income that belongs to your unsecured creditors unless your lawyer does something to change that or if you are 100% payback to unsecured already. Otherwise those withdrawn funds are not yours.

[despritfreya]

The 401k withdraw is income that belongs to your unsecured creditors unless your lawyer does something to change that. Those withdrawn funds are not yours.

This is at least the second time you have stated this. Please cite to case law authority.

Over the years I have had many clients borrow from their ERISA qualified plans (or withdraw from their IRAs) in order to cure Plan payment defaults, mortgage defaults, purchase necessities, etc. and have not had an issue with a Trustee so long as the asset was deemed exempt as of the Petition date.

Des.

[despritfreya]

Interestingly a very quick search turns up a Texas case from 1 year ago that agrees with flashoflight but qualifies that “agreement”.

In re Arlin, 596 B.R. 516 (Bankr. N.D. Tex. 2019)

Before the Court is the Trustee's Modification of Chapter 13 Plan after Confirmation . . . The Trustee's Plan Modification seeks to modify the Chapter 13 Plan2 filed by. . . the "Debtor " to include funds that the Debtor withdrew from her exempt retirement account after the petition date. The Debtor filed an Objection to the Plan Modification. After considering (of the pleadings before the Court). . . the Court finds and concludes that the Plan Modification. . . should be denied. . .

In this case, the Debtor incurred unexpected medical and home-repair expenses, but she had another potential option to address those expenses – the availability of funds in her exempt 401k Plan. The Debtor believed that she could use the funds in her 401k Plan to pay the unexpected expenses outside of her confirmed plan. Therefore, the Debtor unilaterally withdrew all of the available funds in her 401k Plan and paid the medical and home-repair expenses directly. Unfortunately, she did so without consulting her attorneys, notifying the Trustee, or obtaining prior court approval. . .

The Trustee eventually discovered that the Debtor had withdrawn the funds from her 401k Plan, so the Trustee filed the Plan Modification under § 1329, which triggered several questions and disputes, including the impact, if any, the distribution had on the exempt status of such funds. Specifically, the Trustee argued that the exempt retirement funds lost their exempt status and became property of the estate under § 1306, thereby requiring such funds to be paid to the Trustee to increase the Debtor's Plan Base for the benefit of the pre-petition unsecured creditors. .

The Debtor opted to use the Texas exemptions rather than the federal exemptions and exempted the 401k Funds pursuant to § 42.0021 of the Texas Property Code. There is no dispute that the 401k Funds were the Debtor's exempt property. There is also no dispute that the Debtor did not roll over the Withdrawals into another qualified plan within sixty days of such Withdrawals.

Even though the Debtor did not roll over the Withdrawals into another qualified plan, the Debtor asserts that the Withdrawals remained her exempt property under Texas law and that she could use the funds as she saw fit. The Trustee, on the other hand, argues that the 401K Funds lost their exempt status protection after such funds were distributed to the Debtor and became non-exempt property of the Debtor's bankruptcy estate pursuant to § 1306(a)(1). To determine the effect, if any, the Withdrawals had on the exempt status of the 401k Funds, the Court must analyze and apply the Texas statute. In doing so, this Court follows "the same rules of construction that a Texas court would apply – and under Texas law the starting point of analysis is the plain language of the statute." "When a statute is clear and unambiguous, Texas courts ‘apply its words according to their common meaning in a way that gives effect to every word, clause, and sentence.’ If the "statute's words are unambiguous and yield a single inescapable interpretation, the judge's inquiry is at an end."

Although the words in § 42.0021 of the Texas Property Code appear to be unambiguous, courts do not agree on the interpretation and application of the statute when exempt funds in a retirement plan are distributed. In a chapter 7 case, a Texas bankruptcy judge analyzed § 42.0021 and came to the following well-reasoned conclusion:

Section 42.0021(a) exempts both the assets in the account and the right to payment—the asset that is exempt is distributed to the account holder and is not transformed, but, instead, remains exempt under the IRA exemption statute. Thus, in this case, the Court concludes that the distribution of the exempt asset received by Moore is exempt under the specific language of subsection (a). [T]he exemption does not disappear when the account holder actually receives a distribution. See TEX. CIV. PRAC & REM. CODE § 31.002(f)... [T]he Court concludes that the distribution the debtor received from her IRA did not lose its exempt status simply because she received it.27

The Moore court also concluded that the 60-day period in subsection (c) did not create a "conditional" exemption that disappears retroactively, and that such an interpretation of § 42.0021(c)"is contrary to the Texas exemption scheme for IRAs."28

After Moore , the Fifth Circuit issued its Hawk opinion, which also was a Chapter 7 case. In Hawk , the Fifth Circuit stated:

When the Hawks withdrew funds from the IRA, the Hawks' property interest changed from an interest in assets held in a retirement account to an interest in ‘[a]mounts distributed from a [retirement] account.’ See TEX. PROP. CODE § 42.0021(c). But because § 1306(a)(1) applies only in Chapter 13 cases and no similar provision applies in a Chapter 7 case, there was no means by which the Hawks' newly acquired property interest could become part of the Chapter 7 estate.

[I]f the Hawks held amounts recently distributed from their retirement account when they filed for bankruptcy, those funds would be subject to the applicable sixty-day limitation on the exemption. The Trustee could have objected to the exemption if the liquidated funds were not rolled over into another retirement account within sixty days.

It appears that Hawk disagrees with Moore's interpretation and application of § 42.0021(c) to a distribution of exempt retirement funds. Therefore, even though this is a Chapter 13 case as opposed to a Chapter 7 case, this Court is bound by the Fifth Circuit's application of § 42.0021(c) as specified in Hawk, thereby requiring the Court to conclude that the 401k Funds lost their exempt status when the distributed funds were not rolled over into another retirement account within sixty days. Therefore, the Withdrawals became non-exempt property of the Debtor's bankruptcy estate pursuant to § 1306(a)(1).

Even if there is an argument that the statement in Hawk was not necessary to the Fifth Circuit's ruling and, as such, is dicta or can be distinguished, the Court does not need to decide if Hawk is controlling or if Moore correctly applies Texas law. As detailed below, if the 401k Funds lost their exempt status and the Withdrawals became property of the bankruptcy estate under § 1306(a)(1), the Court still denies both proposed modifications. . .

Bottom line, what happens to an exempt asset in a Chapter 13 upon removal from its exempt status depends 1) upon State law; 2) whether or not property has vested in the debtor and the application of 1306 to such property based upon case law in that district; and 3) the actual circumstances of the case.

Des.

[justbroke]

despritfreya the judge also took a "good faith" approach. The particular circumstances included post-petition medical bills and post-petition home repairs. The debtor should have sought advice of counsel and sought permission from the Chapter 13 Trustee (my opinion). It would have been nice if this went to the District Court, Bankruptcy Review Panel, and then to circuit court of appeals.

But, the lesson remains, that if you are in a Chapter 13 and are having financial issues post-petition... contact your attorney immediately. Do not wait. Do not try to fix it yourself without advice of counsel.

[despritfreya]

But, the lesson remains, that if you are in a Chapter 13 and are having financial issues post-petition... contact your attorney immediately. Do not wait. Do not try to fix it yourself without advice of counsel.

This is so true. Can't tell you how many times clients do things without seeking advice and then we have to do damage control. Luckily, most mistakes can be "fixed" but fixing the mistakes just costs the clients more money.

Des.

[StuckinaRut]

Our attorney said not paying our 2015 in full would not cause problems with our discharge. It may be because we are in a 100% plan.

[justbroke]

Our attorney said not paying our 2015 in full would not cause problems with our discharge. It may be because we are in a 100% plan.

100% plans are special. The debtor in a 100% plan is usually not restricted in any manner (except the sale of certain property).

[Scottowl]

I’m wondering about the 100% plan.
There is no % specified in mine, but I add the claims register, along with monthly trustee fees, and it is less than the total amount I will have paid into it.

I don’t know if my attorney or trustee are aware, or even care, as they are being paid.

[justbroke]

Back in the day (maybe before 2012), the plans included a paragraph which read something to the effect of... "the plan pays XX% to the unsecured creditors." They no longer seem to do this because it's really about the plan base amount. If the plan base amount is covered by all the payments over the length of the plan, then it's a so-called 100% plan. You can also tell if you're in a plan which requires you to pay back all of your creditors, by the language in the plan itself. Those "full payment" plans usually don't have many restrictions on incurring debt, or keeping a tax refund.