Kentucky Bankruptcy Law

Counsel with Care

Post-Holiday Pitfalls for Bankruptcy part 3

Following Christmas comes the tax filing season. The reason this carries special significance in the post-holiday season because for many people, it creates an asset that needs to be taken into account on your schedules (lists of certain kinds of items like assets). The asset to be considered is the tax refund from state and federal governments that may be expected in January through May. A Chapter 7 filed in December will likely still be open in May and one filed in January or later certainly will remain open that long. Therefore, the refunds need to be listed and, if possible, exempted.

If your state allows the use of Federal exemptions, as Kentucky does, then the exemption used to cover the tax refunds would be the “wild card” exemption covered in 11 USC Sect. 522(d)(5). The amounts listed in that provision are adjusted for inflation and so the wild card exemption can be over $11,975.  For most people, there is sufficient 522(d)(5) exemption to cover a few thousand dollars in tax refund dollars.

The key is for your bankruptcy attorney to know the upper limit of what you might realize for tax refunds and exempt as much of that as possible. They must list it as an asset on the schedule of personal property even if it is uncertain as to the amount and then exempt it. This will allow you, the debtor, to keep those funds so long as the trustee does not object to the exemptions claimed.

The treatment of tax refunds needs to be the same in Chapter 13 cases, but if they are particularly large, the trustee in the Chapter 13 may expect the Debtor to change their withholding and pay more into the bankruptcy plan.

If you forgot to tell your attorney (or they forgot to ask) about a tax refund your expect and you have already filed the petition and schedules, it is not too late. Federal Rules of Bankruptcy Procedure Rule 1009 provides for liberal amending of the petition and schedules, so be sure to tell your attorney as soon as you realize the omission.

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January 7, 2013 - Posted by | Bankruptcy, Chapter 13, Chapter 7, Exemptions, Plan, Property (exempt, The estate | , , , , , , , , , ,

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