In a recent blog post, I suggested that bankruptcy might just be the best holiday gift you can give yourself if you’re struggling with unmanageable debt. The holidays are now over. It’s New Year’s resolution time! Getting out of debt is a popular resolution in this debt-ridden society. There are, however, some considerations that are worthy of note should you decide to file bankruptcy early in the new year.
Calculation of income
The bankruptcy schedules look at the prior six months of income to calculate either eligibility for a Chapter 7 (through the Means Test), or to determine the monthly payment for a Chapter 13. If you file early in the year, your prior six months of income will include the month of December. Many people receive holiday or year-end bonuses around this time which can affect your 6 month analysis. A significant annual bonus could potentially disqualify you for a Chapter 7, or increase your Chapter 13 plan payment. Best bet: if you receive a large bonus in December, you might want to wait until July to file your bankruptcy.
Tax returns may need to be filed early
Many people take advantage of the IRS rules that allow us to file for an extension to the regular tax return deadline of April 15. In so doing, the deadline is extended to October. For debtors filing bankruptcy, however, there is no such right. Bankruptcy trustees typically want to see tax returns because of the financial information they can glean from them. This is especially true with self-employed debtors. Ironically, the self-employed tend to be more likely to take advantage of tax filing extensions. But if the trustee wants the return filed right away, you will need to file it sooner than you might have liked. Same goes for corporate returns for debtor-owned businesses. The trustee can hold up your discharge if the filed returns are not timely received.
Tax refund may not be yours to keep
Most debtors do not realize that tax refunds are property of the bankruptcy estate. You don’t have to have received the refund yet; this rule governs before you have even filed your tax returns. The mere expectancy of the refund is itself an asset that is subject to administration by the trustee. Unfortunately, Florida bankruptcy exemptions do not specifically exempt tax refunds. You may, however, apply any available personal property or wildcard exemptions to the tax refund. The portion of the refund derived from “Earned Income Credit” is similarly exempt. First, though, you have to actually list the expected tax refund as an asset on your bankruptcy petition in order to apply exemptions. Unwary debtors can lose their refunds, which may have been otherwise exempt, by failing to list them on their schedules. It can be a costly mistake.
Holiday shopping
If you ran up those credit cards over the holidays, you may not be able to discharge those particular debts right away. Luxury goods totaling $650 or more charged to a single creditor in the 90 days before filing bankruptcy are presumed nondischargeable. Likewise, cash advances that are extensions of consumer credit totaling more than $925 to a single creditor are also presumed nondischargeable when incurred within 70 days of filing bankruptcy.
Conclusion
January can be a wonderful time to shed overwhelming debt and start out the new year with a fresh financial outlook. However, debtors need to pay special attention to certain considerations to ensure that the timing of the bankruptcy is right. Find an experienced bankruptcy attorney and bring up any issues that may affect your filing during the initial consultation. If you need to wait a few months to file, that’s ok. Bankruptcy planning is an important tool when utilized appropriately.
Happy New Year!