In Chap 7 do they always take your tax refund?

[TomTea31]

I'm filing soon, prob by the end of the month. Do I need to be concerned that they will take our tax refund in Feb? Is there anything we can do to stop it? I'm filing alone and the tax refund is prob going to be all my husband's since he's the one working. I do work very part time but it's self employment. We do live in a comm state, WA

[LadyInTheRed]

Since Washington is a community property state, half of the refund is yours. If you cannot exempt your half of the refund, the trustee will take it. You can use Federal exemptions in Washington. If you use federal exemptions and don't need all of yoru $21,625 homestead exemption, you can use up to $10,825 of unused homestead exemption to exempt the refund.

[TomTea31]

I'm not sure what you mean by homestead exemption and exempting my portion of the refund. We don't own a house and have barely any assets, just 2 cheap cars. I wasn't planning to use an attorney because I can't afford it. I am using a bankruptcy agency that does the paperwork for you. Maybe I need an attorney? I have no idea but I honestly would be able to afford one.

[justbroke]

You are in a community property State so 50% of everything is owned by your spouse. If you file, your spouse's 50% entitlement to any tax refund, is not part of your bankruptcy. So, if you were to expect a $10,000 refund for tax year 2011, you'd exempt 50% of that "anticipated tax refund" using the Federal Wildcard Bankruptcy exemption (found in 11 USC 522).

If you don't understand exemptions and the difference between say Washington State's bankruptcy exemption scheme and the Federal Exemption Scheme (11 USC 522), then you should read some more on this. Exempting your property is THE MOST important part of completing your schedules. You need to protect as much property as possible so you don't "lose" anything (or have to buy things back). I would suggest starting with a good bankruptcy guidebook, such as the NoLo Press Guide to Chapter 7. (It's available as an e-Book, downloadable online, and you may be able to search the Internet to find some coupon to get a discount on it. It may also be available in paperback from your neighborhood library.)

Even though you don't own a house, you may own other property that could be subject to liquidation. This includes your cars, furniture, maybe even some expensive jewelry or firearms! You really need to understand exemptions well before you file pro se. At least, that's my opinion.

[LadyInTheRed]

Exemptions protect certain assets from collection. There are federal exemptions and each state has its own exemptions. Some states, including Washington, give you the choice of whether to use state or federal exemptions. The trustee cannot take exempt assets to sell and pay creditors. If you don't have a home and use federal exemptions instead of state exemptions, you have a $10,825 "wild card" exemption that you can use for any property.

It sounds like you are using a document preparation service. Understand that by law they are really just a typing service. They are not allowed to tell you whether to use state or federal exemptions and how to apply the exemptions to your assets. Techinically, they aren't even supposed to decide what information goes into what place on the forms. If you are using a document preparation service you are a pro se filer and must familiarize yourself with the bankruptcy process, including the bankruptcy code, the federal rules of bankruptcy procedure and local bankruptcy court rules. It sounds like you have a simple case that could be filed pro-se, but make sure you understand what you are getting into. A document preparation service cannot give you legal advice. If you file pro-se and change your mind, it will be very difficult, if not impossible, to find an attorney to step in. If you are going to go this route, buy the Nolo Press Chapter 7 book. Unless you have no way to fill out and print forms, I recommend saving your money and skipping the document preparation service.

Have you stopped paying unsecured creditors in order to try to save money for an attorney?

[TomTea31]

I actually don't have any real credit card debt, just 1 card charged off and 1 that I stopped paying 2 months ago. These are tiny amounts compared to the bigger picture. I have 30K in medical, 63K in student loans (that can't be bankrupt on), 3k in misc small debts, and then I'm expecting a huge debt any day now from an auto accident that was my fault. I'm just waiting for the bill.

As far as assets. Do we include our kid's stuff to?

[btbeme]

TomTea, you are wise to wait until all the bills come due. Take that time to get well educated on the crazy-straw logic of the BK code. I would also strongly recommend that you visit some competent BK attorneys - the first consultation is usually free, and after you visit a a half-dozen of so, you will gain a pretty good amount of knowledge.

We can also help here. There are a couple resources you should start reading ASAP. Some of them are in this forum, at the top - the "stickies". You might also consider buying or checking out the Nolo book on Ch 7 bankruptcy - it is a good read.

But to settle your fears, let me give you a couple of absolute truths...

- You will not lost your kids' toys, or really anything else you own - unless your Truste would consider it to be a luxury item, such as an ATV, or a boat. Sounds like you are pretty much clear. The reason is, your stuff isn't worth anything to the Trustee and will essentially be considered "exempt." There are federal and state laws which will tell you what is "exempt" - part of the discussion above is about those very exemptions.

- Getting a Ch 7 discharge will be an awesome, one a lifetime (hopefully) opportunity to start anew. It is up to you to arrange your finances and life to use that opportunity to its fullest.

- Learn as much as you can before you fill out the paperwork and file it. Really. Screwing it up will open a huge bag of hurt. Let us help you get it right. But you have to help, too, so start doing some homework as described above and ask as many questions as you have as you go along. We'll be here for you.

[murphsmom]

We were due a $4500 refund right around the time we filed, as we amended our 2009 refund. The attorney told me (non filing spouse) to immediately put 1/2 in my bank account. The rest fell under our allowable exemptions. Had we not been able to exempt it, the trustee would have taken half.

[TomTea31]

Do I need to worry about the 2011 refund I received in Feb or just the future refund?

[btbeme]

Assuming you file before the end of the year, your 2011 refund will certainly be the one on the hotseat. After that, no problems. I recommend that you change your withholdings ASAP so that extra isn't being taken from your paycheck.

Now, a tax refund is a refund of withholdings, which is otherwise known as income - in this case, income being held by the federal government. If you receive a generous refund due to a refund of withholdings taken from your paycheck, the Trustee sees, in essence, that you had assets (cash) being held for you by a separate entity. Unless those assets were claimed on your filing and covered by an exemption, the Trustee has the right to evaluate whether to seize the asset and distribute it to your creditors.

That being said, there are plenty of times where refunds are given back by the Trustee, for one reason or another (too small; Trustee had a really great day; refund was from tax credits and not from withholding, etc - I have seen many reasons). While you cannot bet on anything more than your refund being taken, there are always exceptions. This spring, I sat in a 341 meeting where the couple noted that they expected a $13,000 refund, due to an expiring federal tax credit for adoption of a child. The feds required that the tax credit be taken as a refund or lost altogether. The Trustee listened, nodded, and said not to worry about it. Now, how he threw that one by the US Trustee, I don't know.

[TomTea31]

This is all very confusing but I know I can get through it. I'm not sure if extras are being withheld. DH is claiming 4 and we're a fo4. Recently he started working an extra job also so I imagine that plays a factor.

[btbeme]

This is all very confusing but I know I can get through it. I'm not sure if extras are being withheld. DH is claiming 4 and we're a fo4. Recently he started working an extra job also so I imagine that plays a factor.

Taxes are simple. What you want to do is reduce your withholding to the point that you do not receive a refund. Otherwise, the refund is fair game.

Problem is, most people fail to do this as part of pre-BK planning. It takes the better part of a year for that withholding change to balance out what is necessary. But, if you change your withholding right now, you will keep more in every paycheck and receive a smaller refund after you file your taxes. More money now = good thing. Less that the Trustee can take = good thing.

[HHM]

Taxes are simple. What you want to do is reduce your withholding to the point that you do not receive a refund. Otherwise, the refund is fair game.

Problem is, most people fail to do this as part of pre-BK planning. It takes the better part of a year for that withholding change to balance out what is necessary. But, if you change your withholding right now, you will keep more in every paycheck and receive a smaller refund after you file your taxes. More money now = good thing. Less that the Trustee can take = good thing.

Generally, the reason trustees start keeping cases open to collect refunds starting in Sept. is that any withholding changes between then and the end of the year will only have a marginal affect on the eventual refund. Granted, that doesn't mean don't make the changes, but if the person qualifies for chapter 7, going from 0 to 9 on your exemptions for 3 months will only have a marginal impact on the refund.

Basically, tax refunds are assets like any other. It's a 3 part analysis (1) ownership (who owns it, or entitled to it, and what is the nature and extent of ownership), (2) value (how much is the asset worth) and (3) exemption, (can all or a portion of the asset be exempted).

Ownership is usually pretty easy, the debtor and debtor spouse if applicable.
Value: again, easy
Exemption: state by state. Generally, tax refunds can only be exempted with a wild card, or some other catch all exemption. The "above the line" child tax credit is exempt, but aside from that, a refund is pretty much exposed to seizure.

[TomTea31]

It's starting to look like I won't need to file until after Dec. Does that matter?

[LadyInTheRed]

It's starting to look like I won't need to file until after Dec. Does that matter?

If you file before you get your refund, it will be an asset. If you file after you get your refund, the cash will be an asset. So, you'll need to either exempt it or spend it on necessary living expenses, attorney fees or non-exempt assets before you file.

The refund may also be part of the calculation of your income which would be an issue if you are close on the means test.