6 Things Not To Do With Your Tax Refund Prior To Filing Bankruptcy
by John G. Merna
The most difficult problems created by a client anticipating filing bankruptcy are generally created before they consult an attorney or undertaken without advising an attorney.
1) Don’t Hide Money
Most people don’t understand or intend to break the law. But hiding money in bankruptcy, or more accurately “not disclosing” money, is a violation of federal law and perjury. Among other possible penalties, prison is the big one. If I had a dollar for every time a client asked me “but what if they don’t know about it” I would be a rich man.
The reality is that 99% of the cases where clients are concerned about their savings or money… the money can be protected without committing perjury. The vast majority of Chapter 7 cases are what are called “no-asset“ cases. This means the bankruptcy trustee is unable to get any property, let alone money, from the debtor.
The small percentage of “asset” cases , or people that turn over property to the trustee, are generally people who knew in advance from their attorney this would occur and did so intentionally because the value of eliminating their debt was far greater then the money. Everyone else who lost tax refunds in bankruptcy were caught off guard because they did not use an attorney and could probably have protected the money. If you’re concerned at all about any assets ask your attorney and he will guide you.
2) Don’t Pay Back Relatives…Just Yet.
After 20 years of practicing bankruptcy I’ve learned that people believe that moral obligations supersede legal requirements. Yes, it is important that you maintain your obligations moral or otherwise. However, in the context of the bankruptcy, if you are paying back a relative instead of paying your other debt it will be a problem. It is called “preferential treatment to an insider”.
Do not pay your relatives back with your tax refund it leaves them vulnerable to having the money taken by the bankruptcy trustee. Any payment to a insider, which is a relative or close associate, is potentially a form of fraudulent transfer. Most contracts with relatives are not in writing. So you have several problems with regards to paying back relatives on the eve of filing bankruptcy.
Most people would choose to pay their relative instead of paying their debt. Don’t do it. You don’t have to. Generally, you can protect the money and pay your relative back later. However, if you do it before you file your bankruptcy you complicate your whole process and you put the relative in a position to possibly having to return the money to the trustee. Consult a bankruptcy attorney. The attorney can tell you how to navigate and protect the money that you were going to use to pay back the relative.
3) Don’t Pay Any Unsecured Creditor Over $600 Shortly Before Filing.
Often before filing, debtors assume paying off small creditors will somehow benefit them by making their credit look better. In a bankruptcy you are required to disclose any payments greater than $600 made in the 90 days prior to filing. Those payments can be recaptured or retrieved by the trustee. It’s not to your benefit to be paying off unsecured creditor. The money is wasted. The debt would be wiped out. And you are likely to see the trustee recover this money to pay your debt. When in doubt about any decision to pay a creditor on the eve of bankruptcy consult your bankruptcy attorney.
4) Don’t Let Uncle Sam Hold On To Your Large Refund Until After Filing.
Generally, it is not a good idea to let Uncle Sam hold onto your tax refund if it’s a large one . If are anticipating a large refund it will need to be protected in your bankruptcy. If the refund is too large in Virginia you may not have enough protection for the refund. To avoid losing all or part of it you can wait until you receive it and spend the unprotected portion on “reasonable and necessary” expenses. There are protections now in place as of 2015 that protect the earned income credit (EIC) portion of your tax refund. However, many people receive large non-EIC refunds. When in doubt, talk to your attorney.
5) Don’t Buy Luxury Goods Or Vacations On The Eve Of Bankruptcy.
Tax refunds are probably the largest infusion of money most people received during the year. Most people use their refund to pay off some debt, make needed repairs, or take long put off vacations. One problem you have is the purchase of any luxury goods and or luxury vacations. Just to be clear visiting mom is not a luxury vacation. She may do your wash. She may feed you but still it’s not a luxury vacation. Hold off on splurging in general is you are about to file bankruptcy.
6) Transferring property to “protect it”.
A common misconception is that if property is not in your name, it is untouchable by the bankruptcy court. Wrong. Wrong. Wrong. Giving property to Mom does not protect it. Giving property to uncle Bud does not protect it. Giving property to your friend for no money is not a bonafide transfer for value. Consult your attorney. Remember. You paid the attorney to guide you. Get your money’s worth.
It goes without saying you should retain an attorney as soon as you are considering bankruptcy. He can direct you through the process of filing your taxes, what to do with any refund, what property is protected or not, who to pay and who to not, and much more. A good bankruptcy attorney is attorney is worth his/her weight in gold. Don’t be dumb. Get one soon.
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