Tax Refunds and Bankruptcy

Tax season is upon us, and there is only one good thing about tax season (some of the time)… tax refunds.

If you are considering filing bankruptcy, and expect to receive a refund, it will probably be protected from your creditors. When you file bankruptcy, you must list all of your assets and all of your debts in the schedules. Tax refunds, or potential tax refunds, are considered an asset, and must be exempted from your creditors.

There is no specific exemption under federal law for a tax refund. However, the “wild card” exemption allows you to protect tax refunds, among other things. The first step if you are considering filing bankruptcy this spring is to actually file your taxes and determine what your refund will be. If you don’t do this, the bankruptcy trustees may hold your case open until the amount is determined.

Once you know what your refund will be, consult with your bankruptcy attorney to determine how best to exempt it. If your refund is particularly large, you may need to spend it down naturally, over several months. If, however, your refund is more modest, it is likely just a matter of excempting it with the available exemptions under federal bankruptcy law.

A second note about taxes and bankruptcy is you must have all of your taxes for the last four years filed. If you are not required to file taxes (because you are on Social Security or have no income), this is not an issue. But, if you are required to file taxes, it must be done before you file. Otherwise, you may not receive a bankruptcy discharge. Now, the taxes must just be filed, not necessarily PAID. So, if you believe you’ll owe the IRS money (or the state or local authorities), it will not prevent you from filing bankruptcy. 

If you have any questions about your tax refund and bankruptcy, or any other bankruptcy questions, contact us at 412-414-9366. I would be happy to set up a free consultation to discuss your situation and see if I can help.

Liquidation Alternative Test

The liquidation alternative test is a somewhat confusing aspect of bankruptcy law. It requires debtors to repay unsecured creditors for any amount above the exemptions allowable for their property. Let me give a basic example.

Let’s say your house is worth $100,000 and it is owned outright with only you on the deed. With no mortgage or any other liens, you have $100,000 in equity. Under the bankruptcy code, you can exempt roughly $25,000 of this equity. This leaves $75,000 in equity that is not exempt. If you were to file a Chapter 7 bankruptcy in the scenario , the United States Trustee could theoretically liquidate your house and use this $75,000 in unexempt equity to pay your creditors! Obviously, this is not a good option.

The alternative to liquidating your home would be paying back your unsecured creditors up to the $75,000 in unexempt equity. Now, in this example , that may prove to be impossible as it is a lot of money to repay. However, in many examples the unexempt equity is much less. Let’s try a different but similar scenario.

Let’s say your home is still worth $100,000, but you also have $40,000 remaining on your mortgage. You also have a $10,000 tax lien . Finally, let’s say that you have a $15,000 home equity loan. That is $65,000 in liens on your $100,000 home. If this scenario you have $35,000 in equity of which $25,000 can be exempted. That leaves $10,000 in unexempt equity under the liquidation alternative test. In this scenario you can repay up to $10,000 to your unsecured creditors to satisfy the test.

If you owe $75,000 to your unsecured creditors, the balance of $65,000 is discharged in the chapter 13 bankruptcy.

So, it will be very important to determine several things when looking at the liquidation alternative test. The easiest thing to determine is what you owe. You can simply do that with mortgage statements and tax statements.  The trickier thing to figure out is what your home is worth. That may require a formal appraisal or a realtor assessment. Once you have both of those numbers, it will be easy to determine.

It should be noted, the liquidation alternative test does not just apply to real estate. Any property that you own that goes beyond your ability to exempt it  is potentially an issue. This may include cars that are owned outright, savings in a bank account, collectibles or antiques, or basically any other property. However, homes are the most common issue.

If you were considering filing bankruptcy, call us at 412-414-9366 to set up a free consultation , I would be happy to sit down and determine if the liquidation alternative test or anything else will be an issue with your filing.

Financial Resolutions

New Year’s is a time to both reflect and look forward. It’s also a time of the year when people make resolutions. A pretty common resolution to clean up your finances. What are some things that you should consider when resolving to clean up your finances?

The first thing I would suggest considering is whether or not you are able to pay down the balances on your outstanding debt, especially unsecured debt like credit cards. If you are continuing to aggressively pay down these balances, great, keep it up! If, even after you make payments to your creditors every month, the balances either stay the same or even go up, you should consider whether bankruptcy is an option. Chapter 7 bankruptcy may completely wipe out your unsecured debt. If you don’t qualify for Chapter 7 bankruptcy, a Chapter 13 bankruptcy can at least help you freeze your balances and stop the high interest payments.

A second thing to keep in mind when looking ahead is your secured payments like mortgages and cars. If you have a mortgage with an adjustable interest rate, you should plan ahead. With interest rates increasing you may need to make a higher monthly payment going forward. This is something to keep in mind when budgeting. If you need a new car, you should consider your budget as well. If you’re making payments that are handling your other debts, you were probably in good position to get a new vehicle. If you’re falling behind, or struggling to keep up, it may be best to try to get one more year out of your car.

Finally, you should consider sitting down and making a detailed budget. I mentioned this previously when considering whether or not to buy a new car. It sounds simple, but it really does help to sit down and write out all of your expenses, from mortgages and car payments all the way down to small things like streaming services and daily coffee trips. It may help you realize things that you can easily cut out. It may help you look at places to tighten the budget. If your income is going to go up, it could give you the confidence to invest more money or even plan a trip you have been waiting to take.

Personally, I occasionally go through my own budget to get a better feel for my finances. I think it helps.

If bankruptcy or possibly a debt settlement are in your plans for 2023, call us at 412-414-9366. I would be happy to set up a free consultation and discuss your situation. Now is a good time to think about your financial situation and whether or not you are in a good place or if you need some help.

Means Test Update

The means test has been updated for the Western District of Pennsylvania, and has slighly increased.

The means test is a 6 month look-back at ALL sources of GROSS income. Household size is determined by IRS dependents and whether you are a married couple. If you are married and living together, the means test looks at both incomes, even if only one spouse is planning to file. The means test is discussed in more detail in this blog and on this website.

Here are the new means test limits for gross income earned in the six months before filing:

• Household of one: $30,765.00

• Household of two: $37,184.50

• Household of three: $46,706.00

• Household of four: $56,518.50

• Household of five: $61,468.50I

• Household of six: $66,418.50

• Household of seven: $71,368.50

If you have any questions about the means test and whether or not you qualify for Chapter 7 bankruptcy, call us at 412-414-9366. I would be happy to set up a free consultation to discuss your situation. I would be happy to review the means test and see whether or not you qualify.

The Problem of Rising Interest Rates

The federal reserve has raised the baseline interest rate from 0% to 3.75% in the last several months, and the rate is projected to continue to increase. This has an incredible effect on the how much it costs to service debt. Everything from mortgage payments to car payments to credit cards to personal loans will become more expensive to service or acquire. This will make it easier to accrue large amounts of debt and harder to pay the debt that you already have.

Hopefully, if you already have a mortgage, the payment has a fixed interest rate. Variable interest rate mortgages stand to increase greatly in the coming months and years. Fortunately, there are not as many variable interest rate mortgages as there once were, especially before the financial crash of 2008 and 2009. However, if you have a variable interest rate loan, you should watch your mortgage statement closely in the coming months as the payment could go up significantly. Also, if you are seeking a mortgage or any loan in the near future, you should absolutely avoid variable interest rates.

Consolidation loans will also get more expensive. This makes it harder to consolidate a collection of credit card debt under one loan. Chapter 13 bankruptcy may be a good alternative option as creditors are always repaid at 0% interest over the course of the bankruptcy plan. Therefore, increasing interest rates do not make a chapter 13 bankruptcy repayment plan more expensive. This is an important consideration because interest is often the hardest part to get under control with unsecured debt. Chapter 13 bankruptcy locks in your current amount and actually gives you a target to pay off. Your balances will actually go down when you stop having to pay high (and getting higher) interest rates.

There is no real good advice for how to deal with higher interest rates. They affect everyone and make everything more expensive. The idea is to decrease the attractiveness of taking out loans and therefore slowing down the economy. To whatever extent you can avoid taking out loans, obviously you should do so. But unfortunately that is not always an option in life. If you need to buy a home you can’t just wait until interest rates drop. One positive side effect of higher interest rates when buying a home is that it tends to decrease the actual cost of the home, sometimes greatly. If you need to buy a home now, the best case scenario would be to pay the higher interest rates in the next several years and then refinance to a lower rate when interest rates drop.

Higher interest rates are a problem for almost everyone. If you have been considering a loan consolidation but now find it less affordable, contact us at 412-414-9366 to set up a free consultation. Chapter 13 bankruptcy may be an option to step outside of the pain of higher interest rates.