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November and December for bankruptcy attorneys is like tax time for accountants. As we head toward the end of the year, bankruptcy filings begin to increase.
Why?
One aspect of bankruptcy planning for Chapter 7 bankruptcy cases is making sure as much of a client’s tax refund is protected from the hands of the bankruptcy trustee. A debtor, someone who files for bankruptcy, has an interest in a tax refund on January 1st of the year. Even if they don’t file their tax returns until April 15th. Filing in the new year usually opens the door to allowing the bankruptcy to claim refunds.
We can exempt tax refunds utilizing Nebraska’s “Wildcard” exemption, but under many circumstances, it isn’t enough to protect the entire tax refund. Any portion of your tax refund which is attributable to the Earned Income Credit is also safe.
In the process of bankruptcy planning, a bankruptcy attorney should review the client’s past tax returns the client has provided. If there have been large refunds in the past, there may be a need to file a bankruptcy case before the end of the year.
If there is enough time before a bankruptcy needs to be filed, a bankruptcy attorney may advise the clients to change their withholding so that a large tax refund isn’t received. Instead, the clients will have more disposable monthly income, which may help with the mortgage or car payment.
As a matter of practice, it is always a good idea to make sure you have the proper payroll withholdings even if you are not planning to be filing bankruptcy. You will have more money in your pocket each month to spend on whatever you need to. Some people use the tax refund as a savings device for a special trip or to buy something large, but this is a bad way to save money. You give however much in the form of taxes to the government at 0% interest to you when a portion of those taxes are refunded to you..
If you normally receive $4,800 in the form of a tax refund, that is like putting an additional $400.00 per month in your pocket. If you were to put that into a new Bank of Nebraska Investment Checking Account, earning 3% interest as of November 2013 (NOTE: I am not affiliated nor have an account at Bank of Nebraska), you will have earned nearly $80.00 extra in interest. You just saved a week’s worth of groceries.
In Nebraska, tax refunds are not as much of an issue in Chapter 13 cases.
Bankruptcy planning is more than just planning for protecting a tax refund. Speak with a bankruptcy attorney to see how other assets can be protected by a bankruptcy filing.