Stimulus rebate / tax refund - What happens to it in bankruptcy?

[MajorMike]

That's NOT true! You ABSOLUTELY CAN file an objection with the court! You may not be able to stop him from taking it but you can object to it and file a motion of the objection and go before your bankruptcy judge. I WILL Do SO if mine is taken!

I hope they take ours and apply it to the debt to the IRS.
We don't want it....and I know our trustee doesn't want it either.

[HHM]

So if I OWE taxes, the refund will offset how much I owe. So either way, the government gets my money, right?

I would not count on it. After all, your taxes are due April 15th, and the rebates do not go out until May. Unless you qualify for a filing extension or work out a payment plan, you still have to cut the check to pay your taxes when you file your return, and then you will get your stimulus rebate in May.

[phoenyx]

I would not count on it. After all, your taxes are due April 15th, and the rebates do not go out until May. Unless you qualify for a filing extension or work out a payment plan, you still have to cut the check to pay your taxes when you file your return, and then you will get your stimulus rebate in May.

Yes, very good point. If you owe taxes in the past or with your return due by April 15th, you still have to pay whatever tax is due. You cannot simply have them apply your stimulus payment toward your tax liability.

Even if you file an extension, you are still supposed to pay the taxes you think you will owe by April 15, and reconcile that payment later when you file your return by the extension due date.

That all being said, if you don't pay taxes from the past or with your return due by April 15, they are entitled to and supposed to take your stimulus payment and apply it toward an outstanding tax balance.

However, the key difference as HHM pointed out is the timing. The IRS would be able to accrue penalty and interest charges from the date the tax was due (April 15 for the returns being filed now) until the date it was "paid" by the stimulus payment. If the stimulus payment didn't take care of it all, you would still keep accruing additional penalties and interest. Believe me, penalties and interest add up faster than anyone could ever imagine who hasn't been through it before.

What you are supposed to do is pay the tax you owe, and then perhaps get a stimulus payment back.


That being said, if you are in a situation where you financially cannot pay your tax, fill IRS Form 1127 with your tax return. Although the IRS likes pretending that you cannot apply for an extension on paying your tax as well, they are required to do so by law under certain circumstances and the form is right on their website.

The extension to pay tax is not automatically approved like filing an extension to file your return. To be approved, you must prove that you were reasonable in attempting to have funds to pay your tax, however through no fault of your own and due to circumstances beyond your control that you are unable to pay. You must also prove that paying on time will cause you a financial hardship, which means that paying the tax would be at the cost of not being able to meet your basic living expenses. The drawback to this form is that, if approved, you grant the IRS the right to file a tax lien immediately. However, if you don't pay anyway, they will likely file a tax lien anyway. (This might be avoided if the stimulus payment is taken quick enough and covers all your tax, I don't think they would file a tax lien if it is taken care of within about a month.) And, if your extension to pay is approved, you get six months to pay late without accruing penalties (you do accrue interest.)

[AMISLANDER]

I am currently in a payment plan with the IRS but still can not figure out if they will apply this stimulus check to my IRS debt, or allow me to receive it?

[phoenyx]

I am currently in a payment plan with the IRS but still can not figure out if they will apply this stimulus check to my IRS debt, or allow me to receive it?

I believe the answer is that they will apply the stimulus payment toward the tax you are paying in the payment plan.

Even though it's a one time refund, it's still a refund so I see no reason why they would treat it otherwise, unless they decide to do so for a public policy benefit, which I haven't heard any talk of them doing in this case.

http://www.irs.gov/faqs/faq-kw93.html -- (emphasis added)

1.12 IRS Procedures: Refund Inquiries

Can a person receive a tax refund if they are currently in a payment plan for prior year's federal taxes?

As a condition of your agreement, any refund due you in a future year will be applied against the amount you owe. Therefore, you may not get all of your refund if you owe certain past-due amounts, such as federal tax, state tax, a student loan, or child support. The IRS will automatically apply the refund to the taxes owed. If the refund does not take care of the tax debt; you must continue the installment agreement.

[HHM]

I think they will apply the refund to your taxes if you owe taxes, the point of my post was to point out that there does not seem to be a away to "proactively" apply the refund. So, for example, if you end-up owing taxes this year, you cannot simply send in you tax return and tell the IRS to apply the rebate to your owed taxes. You still need to cut the check and get it in by April 15.

Now, if you go into default, or otherwise owe the IRS, you are correct, the IRS will probably keep the rebate.

[laurannm]

What if you file after you receive your stimulus payment? Is that payment then considered income on your means test?

[phoenyx]

What if you file after you receive your stimulus payment? Is that payment then considered income on your means test?

Good question!

I am going to add the answer to this question in one of the first two posts in this thread, once I hear the opinion of some other people.

This issue might be another "we don't know yet", sadly.

The means test uses gross (before tax) income, instead of net (after tax) income.


So, there's two ways we can look at this issue.

First, we could say it would affect the means test. Since the means test uses gross rather than net income, it shouldn't affect your means test income amount. However, perhaps it should reduce your line 25 expense for "Other Necessary Expenses : taxes" if you are taking an expense there.

However, we could say that it shouldn't affect the means test. We could argue that since this is a one time (non recurring) tax benefit that it shouldn't be used to calculate your ability to meet your living obligations. We could also argue that the stimulus payment is technically a refund on your 2008 taxes -- that is, for the tax return being filed next year by April 15, 2009. But, I'm not sure if any of these arguments would hold up.


Also, it may come down to how other IRS credits are treated on the means test. I would imagine that credits such as the Earned Income Credit and the Additional Child Tax Credit affect your means test, so perhaps the stimulus payment should also.


Then again, trustees might not want to get involved in this since it may become a litigated issue, like whether stimulus payments may be seized and under what conditions.

[seanf12]

I found this article that seems to indicate that it would be considered income:

http://www.************************/...le-bankruptcy/

However, the article seems to infer that a tax refund is also considered income (see the line: "If the numbers in your means test are close, it may be that the tax rebate (especially if combined with a tax refund at about the same time) will be enough to change the outcome".

I always thought a tax refund was not considered income? Hopefully others will chime in as well

Thanks!

[phoenyx]

That article does claim that if you file bankruptcy in the six months after receiving a tax rebate, that the rebate is added to other income for the purposes of the means test.

Someone more familiar with the means test might be able to chime in. I could see them placing the rebate as other income on the means test, but I would think it would be more appropriate to reduce the deduction you're taking for tax expense.

As for what is considered income, it depends on what context income is being decided. Each situation you calculate income for has a set of rules for it. The IRS has a way to calculate it, Social Security Disability has a different way to calculate it, and the means test has a different way as well. As for your IRS tax returns: IRS refunds aren't considered income; and state refunds are only considered income if you itemized and deducted them previously. As for the means test, they are trying to figure out what funds you have available to meet basic living expenses. If you're taking a reduction in what funds you have available due to taxes, it seems fair that refunds should offset against that reduction somewhere in the means test.

[seanf12]

Just to confuse the issue a bit more, I posted a couple of questions to allexperts.com and lawguru.com, which are supposedly answered by lawyers. Both have said that they do not believe it will be income, since technically speaking the rebate is actually a new tax credit that will be taking affect next year (we are just receiving it a year early).

So it appears this is very much up in the air. I am guessing the UST office will chime in eventually with an official stance. I did find this link though that lists item #7 as not including tax refunds (Other Sources Of Income)

http://www.usdoj.gov/ust/eo/bapcpa/docs/Disposable_Income_Ch13_UST_Policies.pdf

[phoenyx]

I met with my attorney today, and we filed my Chapter 7 petition.

While chit-chatting with him, I brought up the stimulus payment discussions we've been having.

He said that there's two types of "failing" the means test. There's failing it, and there's FAILING it.

He said in the situation where a debtor technically fails the means test, but can prove and sign an affadavit that their income is decreasing beyond their control immediately, that some trustees will decide not to exercise their option to dismiss your case or force you to a Chapter 13. Some of the trustees realize that it makes no sense for you to wait six months, and refile to pass the means test then.

He said he usually only uses this in a scenario where a debtor either lost their job, or got a pay reduction because their employer is in financial troubles as well, and has no realistic expectation to be able to bring their income back to where it was. He said that he has been able to get trustees not to dismiss a case or force it to be a Chapter 13 in this scenario.

HOWEVER, he said receiving the stimulus payment is very different than having a reduction in earned income. He wasn't sure the same argument could be made that would give you a pass on the means test.


That being said, many Chapter 7 filers either pass the means test with flying colors, or fail it being nowhere close. There are, of course, always going to be borderline cases, but typically that will be the exception not the norm.

Until you've done the math, don't freak out about whether an extra $300-$1,200 of annual income will put you over on the means test.

If the math turns out that the stimulus payment puts you over in the means test, definately seek professional help from a bankruptcy attorney to explore your options.

[laurannm]

Great post, and good luck Phoeynx!

[seanf12]

Thanks Phoeynx, and good luck on your filing!

Unfortunately I think I am one of those borderline cases. If in fact the stimulus is considered income (I confirmed we are receiving $2100, family of 5), then in all likelihood it will push us over the edge to a 13. Now just to confirm, if it is income, they would take the $2100 and divide by 6 and use that figure on the means test, correct? Or do they annualize it over 12 months and use that number instead?

Either way, I guess there really isn't much we can do. I think I am slowly but surely accepting the fact that while a Chapter 7 is preferable, a Chapter 13 may not be as bad I think it is and in fact will certainly give us a better future.

[diviaruba]

Just to confuse the issue a bit more, I posted a couple of questions to allexperts.com and lawguru.com, which are supposedly answered by lawyers. Both have said that they do not believe it will be income, since technically speaking the rebate is actually a new tax credit that will be taking affect next year (we are just receiving it a year early).

So it appears this is very much up in the air. I am guessing the UST office will chime in eventually with an official stance. I did find this link though that lists item #7 as not including tax refunds (Other Sources Of Income)

http://www.usdoj.gov/ust/eo/bapcpa/d...T_Policies.pdf

http://www.orb.uscourts.gov/orb/newopinions.nsf/7319DC58D69349E9882572FF006CEC20/$file/mullen%20opinion.pdf?openelement