Arizona Bankruptcy Attorney Blog

At this time of year, people may be getting a tax refund, which is a good thing if you owe a lot of debt.

On the other hand, if you owe a lot of debt, you may be considering filing a bankruptcy sometime soon.

When you contemplate a bankruptcy filing, a lot of questions may well pass through your mind, including what do I get to keep, and what debts will be discharged, and how do I fill out the bankruptcy forms, and what happens at a first meeting of creditors?

Many people forget this question: what happens to my tax refund if I have not received it and spent it on food and mortgage or rent and medicine and legal fees prior to filing my bankruptcy?

In this little educational bankruptcy video, I talk about that, and I also make reference to the "secret bankruptcy exemption", which is almost like a mini-wild-card exemption in Arizona; the secret is simple economics.

It costs a bankruptcy trustee something to administer a case, and if the total amount of non-exempt assets in the case appears to be less than about eight hundred or a thousand dollars, there's a good chance that the trustee will stamp the file "no asset", and move on to the next.

Here's the video:

I don't know Governor Jan Brewer. Some people like her, some hate her, because that is the fate of politicians. It all depends on whose ox is getting gored.

But I always like it when a politician cuts taxes. Always. 

And it happens so infrequently that I'm disproportionately happy when I see it.

Now, I'd like to see taxes cut far more.

But hey, "slash" is far better than a 66% increase, of the sort that happened in Illinois recently.

And my overall theory is that more jobs are better than no jobs. So lower taxes on businesses is a good thing, right?

Because I'm in a pretty good spot as a Bankruptcy Lawyer in Arizona to see what employers do when costs of any kind go up.

And that's simple; they fire employees, because it's better to fire them than failing to pay 'em. They get so cranky when they don't get paid, you know?

And if it sounds like I see anything funny about people losing jobs, I sure have you fooled.

That one is pretty simple. You lose it if you have not spent it on ordinary living expenses, non-dischargeable debts like child support, or legal fees by the date of your bankruptcy filing.

I discuss tax refunds and Chapter 7 Bankruptcy Cases in Arizona at a little greater length here.

I've written often in the past about tax refunds. They are one of those things that makes the timing of a bankruptcy a little tricky.

Now, some folks are easy to fix with a bankruptcy in Arizona, because some folks are lucky. They have a lot of debt, they stop making payments, and their creditors promptly take a nap!

With our lucky bankruptcy clients, we can tinker with the filing date of their bankruptcy, and wait until the debtor has had time to receive their tax refund, and spend it on food and mortgage and car payment and similar items prior to filing the bankruptcy.

Some folks are not so lucky; their creditors are on amphetamines, and those creditors are hard-driving sons of guns!

And even if there is a substantial tax refund coming in, many debtors can't tolerate being garnished for a couple of months prior to filing, in order to receive and spend that tax refund.

So there are cases in which the optimum result is not achieved for a bankruptcy client, in economic terms, because their facts and situation and pain tolerance just don't permit it.

Consumer bankruptcy is an art, not a science. 

Now, if there's a non-dischargeable priority debt which is not a tax, and a tax refund goes into that bankruptcy estate, and the tax refund is used by the trustee to pay that non-dischargeable priority debt, I'm a lot less sad.

In that situation, the debtor gets much of the benefit of the tax refund, even if he doesn't receive it directly.

And I know that what I just said is a little confusing, but I'll explain it more completely when you drop in to talk with me; until then, remember that if you have not received your tax refund by the date of filing, it belongs to the bankruptcy trustee appointed in your Chapter 7 case, and must go to that trustee, under penalty of losing your bankruptcy discharge.

And that is one heck of a penalty!

p.s. sometimes a trustee will pro-rate the tax refund, so that the debtor will receive some of it. I'll discuss that as time moves forward, but for now, assume that if it goes to the bankruptcy trustee, you will never see it again in this life!

Here in Arizona, we have some remarkably capable, well-qualified, compassionate and experienced Bankruptcy Trustees. I've known a bunch of 'em forever, and some of them I've met more recently.

It's hard to be a Bankruptcy Trustee, because their natural human compassion toward those who suffer through an Arizona bankruptcy case is counterbalanced by their fiduciary obligation to collect non-exempt assets to the full extent of Arizona bankruptcy exemption law and Federal bankruptcy law.

And they do a good job, and like everybody else, they have good days, and less good days. Remember, they'll spend eight hours getting a hundred debtors through first meetings of creditors in Arizona, and doing so with precision, courtesy and efficiency.

Often, a couple with a baby gets bumped to the front of the line by the trustee, to make things easier for the baby and the parents. By and large, trustees are good people in a difficult job.

One recently stood out in my estimation because of her overall attitude toward her job; she was going to do what she had to do under the law, but she wasn't going to make any debtor suffer a bit more than she had to!

Now, that doesn't mean you can be uncooperative with a bankruptcy trustee in Arizona; that would be bad. Putting it a different way, in a bankruptcy case in Arizona, let the Wookie win!

But here's a bankruptcy video in which I talk about the plight of the poor trustee, who has to do hard, technical work, and try to do it without causing more pain than necessary. And understanding that the trustee doesn't want to make you suffer may make the process a little easier for a debtor in an Arizona Chapter 7 bankruptcy case.

Or not.


.

Probably. Either you'll wait to file your Chapter 7 Bankruptcy in Arizona or you'll lose the tax refund.

On the other hand, the Chapter 7 Bankruptcy Trustee may decide to give back your tax refund. But not for the reasons you think! Remember, the Pity Pitch doesn't work very well in the Bankruptcy Court, because everybody there has a pretty decent Pity Pitch!

But I talk about a couple of the ways that you may be able to keep all or some portion of your tax refund in this educational bankruptcy video; on the other hand, the hands-down most effective way to keep your tax refund is to wait to file until you receive it, spend it for food and a rent or mortgage payment and to pay your bankruptcy attorney, and then file!

Here's a video where I discuss the issue (and I'm including an url, which looks funny, but some of the sites where my bankruptcy blog is syndicated don't seem to do a good job of picking up my links or my videos!): http://www.youtube.com/watch?v=e7nVbUzsZfQ

I recently read an interesting article about using credit cards to pay taxes prior to bankruptcy, then waiting until the debtor is well outside the 90-day presumption period prior to filing a bankruptcy.

There's a specific statute that makes credit card debt incurred to pay taxes nondischargeable. It's one of the sub-sub-subs at 11 USC 523:

(14) incurred to pay a tax to the United States that would be nondischargeable pursuant to paragraph (1);
(14A) incurred to pay a tax to a governmental unit, other than the United States, that would be nondischargeable under paragraph (1);

Now, the idea of using credit cards to pay off what would otherwise be nondischargeable debt, and then filing a bankruptcy to discharge the credit card debt, is clearly one that has arisen independently in many creative minds, because Congress specifically built a statute to make the credit card debt incurred to pay off taxes non-dischargeable.

And other lawyers have written about this topic, including Rob Rickman, in the excellent GA Bankruptcy Blog.

And Rob Rickman has pointed out that in his experience, credit cards often don't notice.

Nota bene: I am not suggesting or advising that you run out and use ten different credit cards to pay off a big non-dischargeable tax debt, and then wait six or seven months to file a bankruptcy.

For one thing, I am forbidden by the 2005 Amendments to advise a client to incur new debt prior to a bankruptcy for any purpose whatsoever.

But I can easily see how a debtor might prefer owing money to a credit card company to owing money to the IRS, and how a debtor might make that decision independent of any bankruptcy advice from any experienced or inexperienced bankruptcy lawyer in Arizona, in Georgia, or in Tokyo.

You know?

Or to paraphrase Ghostbusters, "Who Ya Gonna Owe?"

I got an email from a friend who had been a bankruptcy paralegal for many years.

She had a friend who had filed a pro-per bankruptcy (without a lawyer, and without even talking to my very knowledgeable former-paralegal buddy).

So she lost a tax refund she didn't have to lose; and she filed without her husband, which is seldom a good idea, because although filing a bankruptcy with an experienced Arizona bankruptcy lawyer costs money, defending the lawsuits against hubby is going to cost a bundle more!

And my paralegal buddy told me that the amount of the tax refund the pro-per debtor lost to the bankruptcy trustee was more than enough to have paid an established bankruptcy specialist attorney in Arizona.

Oh, well.

A lot of people think that the statutes are written in English, so they can do everything themselves; and the reality is that they're written in Bankruptcylawish, which is very different indeed from English.

Mind you, the champs among sad debtors are those who lose real estate commissions by filing pro-per or with newbie bk lawyers in Az; those are really post-graduate work in consumer bankruptcy cases in Arizona. The trustees understand the concept of real estate commissions that are "in the pipeline".

But people get to pay their money and take their choices; on the other hand, there are so many things that can go wrong in consumer bankruptcy cases in Az that it would scare me blue to try to do it myself.

I'd hire a board certified bankruptcy lawyer with an AV rating and a lot of reviews on AVVO, just to reduce my blood pressure a bit during the process!

But that's just me; I've always been a little risk averse, you know?

Every now and then (actually, ten times a day or so) I get an advertisement about a new seminar being run by somebody or another, including the State Bar of Arizona, or the Maricopa County Bar Association, or the American Bar Association, and they're usually about bankruptcy if they're being sent to me.

I recently got such an advertisement for a law seminar, and this was the title:

"What Entertainment and Sports Lawyers Need to Know about Mitigating the Effects of a Projected $1.1 Trillion in New Tax Increases over the Next 10 Years, Starting 2011"

Now, I'm a bankruptcy attorney in Phoenix, Arizona, and here's something I know: the higher taxes go, the less money there is for private enterprise to create jobs, and the fewer jobs there are, the more work there is for bankruptcy lawyers in Arizona.

So the title of the seminar scared me silly in its implications for a recovery from this depression in which the U.S. economy is buried. I want to see that recovery from this depression. As soon as possible.

And I suppose at another level, I should really be grateful for more taxation, because in one category it probably is good for job creation and full employment.

For bankruptcy lawyers in Arizona.

I was at a seminar last night and talked after the class to a couple of very smart lawyers who are buddies of mine.

The talk turned, as it always does, to the economy and it's effect on our various practices.

One of my buddies did a lot of Chapter 13 cases at one point, and he's tapered off, for two reasons. The current version of a Chapter 13 Bankruptcy is much more brutal on the poor debtor than the nifty version we all used back in the good old days (pre-2005 bankruptcy code amendments).

And the economy is so bad, he mentioned, that after he fights like a dog to get a Chapter 13 Plan confirmed in his client's bankruptcy, the debtor loses a job or takes a cut in pay, and the case turns to poop!

Another buddy I saw at the seminar is a tax lawyer who handles a lot of tax controversies.

He echoed the concerns I'd just heard; when he gets a payment arrangement set up with the IRS, or gets an Offer and Compromise approved, the debtor's business fails and the debtor can't make good on the carefully crafted stipulation!

It's a bad economy when a debtor has a problem, fixes the problem by working with a lawyer to cut a favorable deal, and then the debtor falls apart and can't make the payments, through no fault of his own.

And I hope things improve very, very soon.

If that doesn't scare you out of your socks, nothing will.

However, the IRS has recently announced that it's currently kinder and gentler, and I certainly hope so.

Such an approach would be economically rational during a depression where about 20 per cent of the population is out of work.

Mind you, I have no way of knowing if the IRS is really kinder and gentler, or just talking smack about your mother's bank account.

Here, in the words of the IRS, is their current position on being a cute, fuzzy bunny sort of government agency:

IRS Outlines Additional Steps to Assist Unemployed Taxpayers and Others

IR-2010-29, March 9, 2010

WASHINGTON — The Internal Revenue Service today announced several additional steps it is taking this tax season to help people having difficulties meeting their tax obligations because of unemployment or other financial problems.

The steps –– an expansion of efforts that began more than a year ago –– include additional flexibility on offers in compromise for struggling taxpayers, a series of Saturday “open houses” offering taxpayers extra opportunities to work out tax problems face to face with the IRS, special outreach with partner groups to unemployed taxpayers and the availability of more information on a special section of the IRS Web site.

“Times are tough for many people, and the IRS wants to do everything it can to help people who have lost their job or face financial strain,” IRS Commissioner Doug Shulman said. “We continue to make adjustments to key programs and expand ways for people to get help. We’re doing everything we can to help ease the burden on struggling taxpayers.”

New Flexibility for Offers in Compromise

For some taxpayers, an offer in compromise –– an agreement between a taxpayer and the IRS that settles the taxpayer’s debt for less than the full amount owed –– continues to be a viable option. IRS employees will now have additional flexibility when considering offers in compromise from taxpayers facing economic troubles, including the recently unemployed.

Specifically, IRS employees will be permitted to consider a taxpayer’s current income and potential for future income when negotiating an offer in compromise. Normally, the standard practice is to judge an offer amount on a taxpayer’s earnings in prior years. This new step provides greater flexibility when considering offers in compromise from the unemployed. The IRS may also require that a taxpayer entering into such an offer in compromise agree to pay more if the taxpayer’s financial situation improves significantly.

These immediate steps are part of an on-going effort by the IRS to ensure the availability of the Offer in Compromise program for taxpayers.

Hundreds of Saturday Open Houses to Resolve Taxpayer Issues

In addition, IRS will hold hundreds of special Saturday open houses to give struggling taxpayers more opportunity to work directly with IRS employees to resolve issues. The offices will be open on March 27 and three additional Saturdays in the spring and early summer. Dates, times and locations will be announced shortly.

During the expanded Saturday hours, taxpayers will be able to address economic hardship issues they may be facing or get help claiming any of the special tax breaks in last year’s American Recovery and Reinvestment Act, including the:

* Homebuyer tax credit
* American Opportunity Credit
* Making Work Pay credit
* Expanded Earned Income Tax Credit

In addition to these special Saturdays, taxpayers can take advantage of toll-free telephone assistance and regularly scheduled hours at local Taxpayer Assistance Centers. Taxpayers can find the location, telephone number and business hours of the nearest assistance center by visiting the Contact My Local Office page on IRS.gov.

Special Outreach Efforts to Unemployed

The IRS is working and coordinating with state departments of revenue and state workforce agencies to help taxpayers who are having problems meeting their tax liabilities because of unemployment or other financial problems.

These coordinated efforts may include opportunities for taxpayers to make payment arrangements and resolve both federal and state tax issues in one place.

Special Section of IRS.gov Created

Taxpayers who are unemployed or struggling financially can find information on a new page on the IRS Web site, IRS.gov. This online tax center has numerous resources including links to information on tax assistance and relief to help struggling taxpayers

Other Options Available for Taxpayers

The IRS will continue to offer other help to taxpayers, including:

* Assistance of the Taxpayer Advocate Service for those taxpayers experiencing particular hardship navigating the IRS.
* Postponement of collection actions in certain hardship cases.
* Added flexibility for missed payments on installment agreements and offers in compromise for previously compliant individuals having difficulty paying.
* Additional review of home values for offers in compromise in cases where real-estate valuations may not be accurate.
* Accelerated levy releases for taxpayers facing economic hardship.

In addition, the IRS will accelerate lien relief for homeowners if a taxpayer cannot refinance or sell a home because of a tax lien. As previously announced, a taxpayer seeking to refinance or sell a home may request the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan. The taxpayer may also request the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances.

Related Item: Publication 4763, Job Related Questions During an Economic Downturn

I just got off the phone with a lovely woman who was arm-wrestling with the IRS over a tax consequence of a short sale.

And she had some other debt and wanted to talk bankruptcy.

Made me wonder how many other folks are trying to short-sell their houses in a good faith effort to be good-do-bees and who are therefore walking into nooses that they don't see coming.

Am I an expert on the tax consequences of short sales? You gotta be kidding. Keeping up with changes in the means test and talking to the endless line of debtors outside my office door keeps me busy. And then there are my business and corporate clients.

Not a tax expert; I know a couple of good ones here in Phoenix, Arizona. Not one myself.

But I'm asking myself if it makes sense to work your behind off trying to get everybody in line for a short sale if the IRS is going to thank you with a massive new tax debt.

Oh, yeah. Some local banks are happy for you to do all the work to put together a short sale to help 'em out.

But their documentation says they can chase you for any deficiency, even though they're agreeing to permit the short sale.

Sounds like being a nice guy is a good way to get....I have a mental picture. It's not a very pretty mental picture.


 

There are some remarkably nice, courteous, and compassionate bankruptcy trustees in Arizona.

Which is remarkable.

Because being a bankruptcy trustee is a little like being a Roman tax collector.

Being a Roman tax collector was an hereditary position, and you couldn't just quit; that would be too easy.

So you were born a tax collector and barring remarkable luck, you stayed a tax collector.

And if you didn't collect the quota required of you under the Roman tax system, the amount of the shortfall was made up out of your assets.

Not a pretty system.

I just got off the phone with one of the best, most effective, and nicest bankruptcy trustees in Arizona, and we discussed the fact that in all the courts of the United States, the Bankruptcy Court is the one where the pity pitch is the least effective, because everyone is up against it in bankruptcy court, and therefore an ordinary pity pitch doesn't work. Because everybody has one.

And collection of non-exempt assets still goes on, because that's the fiduciary duty of the bankruptcy trustee, much like that of Roman tax collectors, and there are severe penalties for trustees who don't do their jobs, as well.

The trustee pointed out that this was tax season, or what her office was referring to as "Dicken's Season", because the process of reminding debtors that their tax refunds were property of the bankruptcy estate, and taking away those tax refunds, made them feel like Scrooge in Dicken's "A Christmas Carol".

The fact that she was able to maintain her perspective and compassion in the midst of so much human misery is a testament to her quality; her parents should be proud of her.

 

Sometimes it's hard for people to hear and understand things when they're under stress, and that means everybody who is contemplating a bankruptcy in Arizona.

So when I ask them if they're getting a tax refund, and I suggest that we wait until they receive it and then they file, some process that information well, and some less well.

Doesn't relate to their I.Q. or numbers of degrees that they have; they might be a CPA.

At the first meeting of creditors, the bankruptcy trustee tells everybody there that their tax returns must go to the bankruptcy trustee. Some have debtors sign pieces of paper that say exactly that.

And it still comes as a surprise to some debtors, even smart ones, when the trustee takes their refund.

Now, when the trustee does the closing statement on their Chapter 7 bankruptcy, there's a chance that there will be a pro-ration of the pre- vs. post- amounts, and that the trustee will refund some of the refund back to the debtor.

But because Chapter 7 trustees are swamped these days (it's a depression, you know), a debtor should NEVER count on getting back a pro-rated amount by any date certain.

That way they're never disappointed.

 

So you're going to get a tax refund.

And you file a bankruptcy quick like a bunny because you have to (lawsuit, foreclosure, or other).

And now you look forward to receiving your tax refund or stimulus check.

Well, no.

That goes to the Chapter 7 Bankruptcy Trustee. Some of 'em here in Arizona have debtors sign a document indicating that the debtor understands that the check is to go directly to the Bankruptcy Trustee, and that their discharge will be vacated if they goof up and spend the dough.

So don't spend the dough!

The trustee may well return the check, someday, if it's small and there are no other assets. One of the reasons there are so many no-asset cases in Arizona is that a Chapter 7 Trustee needs about $800 to cover the administrative costs of administering a Chapter 7 that has assets.

If the total amount the trustee can accumulate to pay creditors is only two hundred dollars, they may well return that small a refund to the Chapter 7 debtor.

But don't count on it.

Even if the trustee is going to return the check to the debtor because it's a small check, or even if the trustee is going to return a pro-rated amount to the debtor because of the date that the Chapter 7 Bankruptcy was filed in Arizona, it won't be back in the debtor's hands until the Trustee gets a Round Tuit.

And Round Tuits are in short supply in Bankruptcy offices of all kinds these days, because everybody is pretty busy, even folks who were divorce lawyers last week and became bankruptcy lawyers this week!