Every year around tax season our clients ask us how bankruptcy will impact the tax refund they are expecting. Some of the questions posed include: Can I spend my tax refund before filing? Can I use my tax refund to pay for the costs of bankruptcy? Should I file bankruptcy before receiving my tax refund? These are all great questions and we will address them here.
The Impact on Taxes Depends on Which Chapter of Bankruptcy
At the outset, we need to clarify that bankruptcy potentially impacts tax refunds differently depending on which chapter of bankruptcy is at issue. In chapter 13 cases, the debtor is generally required to contribute all of their “disposable income” to repay creditors within the plan’s term. This generally requires the debtor to contribute their tax refunds to their chapter 13 plan, although there are some limitations that in many cases allow the debtor to keep some or all of their tax refunds.
Chapter 7 cases are liquidations, which requires the debtor to surrender or “liquidate” any property that is not exempt under Utah’s exemptions. Tax refunds are not exempt. This means that the trustee has a right to any tax refunds that were owed at the time the bankruptcy case was filed–even if the taxes have not been filed and won’t be filed for sometime (as in mid year). This also includes tax refunds that have been received and spent, unless the funds were used for a property purpose. A proper purpose is an expense that is exempt. For example, there is a $3,000 exemption in equity for one vehicle per filer. So you could use $3,000 of your tax refund before you file bankruptcy to purchase a vehicle, if you don’t already own one with equity.
Should I File Bankruptcy Before or After Receiving a Tax Refund?
The timing of filing bankruptcy can be a delicate issue when a tax refund is expected–depending on the time of year. Our generally recommendation at the beginning of a new year, in chapter 7 cases, is to wait to file bankruptcy until after you receive the tax refund and the refunds are already spent on expenses that will not cause additional problems.
How the refund is used is as important an issue as the timing of filing. If you use tax refunds for non-exempt purchases or some other expenses, then you could be required to pay in the tax refunds…even if the money has already been spent! Some examples of expenditures that cause problems include: repaying family members for friends for money they’ve lent to you, family trips, and pre-paying rent. This of course is only a partial list. The best advise we can give is to meet with an experienced and competent bankruptcy attorney BEFORE spending the tax refund to ensure your planned use of the refund won’t cause complications to your bankruptcy case.
Can I Use My Tax Refund To Pay For the Costs of Bankruptcy?
The attorney’s fees and other costs associated with filing bankruptcy are not exempt, so will using them to pay for bankruptcy cause a problem or require me to repay that amount to the trustee? The short answer to this question is using the tax refund to pay for bankruptcy generally will not cause a problem and is one of the best ways to use the refund before filing, to avoid losing the refund.
What To Expect at Your 341 Meeting in Utah
341 Meeting Instructions
Your section 341 meeting of creditors is approaching, so to help ensure a smooth meeting this video will provide you with instructions relating to that meeting. We’ll cover several things: first, who’s involved; second, what to wear; third, what to bring with you; fourth, how the meeting is conducted; and fifth, what happens after the meeting. So let’s get started.
One, Who’s Involved. The meeting of creditors is conducted by the trustee assigned to your case. The trustee is an attorney who is appointed by the court to represent your creditors. The Trustee is not a judge and no issues of law will be addressed at the hearing. You can think of a 341 meeting as a mini deposition—only less formal.
What Should I Wear?
So what should you wear? You should dress informally. You do not need to dress up for the event. In fact, we suggest that you dress normally or dress down, casually; that you do not wear any jewelry or other items of value. We want you to appear as ordinary as possible.
What Do I Need To Bring To the Meeting?
There are several documents that you need to bring with you. You need to bring these documents, even if you have already provided them to our office. They are:
Government-issued picture ID. This can be a driver’s license, state ID card, or a passport. It just needs to be a Government issued picture ID.
You need to bring your social security verification. This can be your original social security card or if you don’t have one or can’t find it, you can also bring an original W-2. It does need to be an original W-2 if you’re bringing that document. If you don’t bring the social security verification, the trustee is required to have you bring you social security verification along with your ID to his office to verify the information you provided of your identity, so please don’t forget.
Your pay stubs. This is your most recent paystubs; the paystub that you received just before the 341 meeting. This will be a paystub that you received after your case has been filed. Each person that’s filed the case, if it’s a couple, must bring your paystub. If you’re self-employed, unemployed, receive disability, or social security then you don’t need to bring the paystub.
You need to bring your bank statement for each account that was open on the date your bankruptcy case was filed. That’s the date that we filed the case with the court. The bank statement or statements MUST cover the date that your case was filed. You should receive several 341 meeting reminders from us that will include the petition date, so you will know exactly which date to cover on that statement. To expedite the meeting, on each statement we want you to circle the balance on the account—that would be the balance you had in the account, so it can be easily seen. The trustee is looking at the bank statements to see how much funds you had on hand at the time your case was filed. As we’ve advised you before filing your case, we want the balance to be as low as possible.
You need to bring your most-recently filed State and Federal Tax Returns. If you haven’t filed in the past two-years then you don’t need to bring them with you. Otherwise, bring the most recently-filed tax returns. Bring BOTH the State and Federal returns.
What Happens at the meeting?
When you arrive at the meeting, please get out your documents and put them in a stack in the order we provided. First, your picture ID; Second, your social security verification; those will be on top. Underneath them will be your most recent paystubs, followed by your bank statements, and finally the most recently filed tax returns.
When you arrive, you will go into the meeting room. The meeting is grouped with several other cases—usually around 8 case. The Trustee will first five an opening statement and explain how he plans to administer the cases. He or she will give you a reminder that any tax refunds or any funds that you had on hand at the time of filing your case are property of the estate and can be required to be turned over. Don’t spend any of these funds until after the 341 meeting and we determine whether any turn-over requirement will be issued. The Trustee will then start calling the cases one-by-one. When your case is called, you will come forward and hand the stack of documents to the attorney present from our office. The Trustee will then put you under oath and have you state your full name(s) for the record. You will then sit down and the Trustee will begin asking routine questions:
Did you carefully read the statements and schedules and related documents filed in your bankruptcy case?
Did you sign the statements and schedules and related documents?
Are the signatures your own? If you signed the statements and schedules and bankruptcy papers electronically, it is your original signature once you adopted it, so the answer would be yes.
Have you read and understand the Bankruptcy Information Sheet? The Trustee Information Sheet five you an overview of the four different chapters of bankruptcy, it explains a discharge and some exceptions to a discharge—like student loans; and finally it explains a reaffirmation agreement. The email reminders that you receive from our office about the 341 meeting will have the Trustee Information Sheet attached. So we recommend that you review that document before the meeting. The Trustee isn’t going to ask you any specifics about it, he just wants to know that you read and understood it.
Then, the Trustee may ask other questions about the assets or other aspects of your case. His job is really to see if there are any assets that are non-exempt that can be taken and sold on behalf of your creditors.
When you answer questions, please keep your answers as short and concise as possible. Keep it to yes or no, if possible. ONLY answer the question that is being asked. Don’t elaborate or volunteer any information that isn’t being asked.
What Happens Next?
Finally, what happens next? After your 341 meeting there is a second educational course that you will have to take. You will receive an email from our office with instructions on taking the course. Take the course as soon as possible after the meeting, so you don’t forget. If you forget to take the course, the court cannot issue a discharge and your case can be closed without a discharge. If that happens, we can file a motion for the case to be reopened and reinstated, so you can take the course and get a discharge but there is additional cost, so it’s best if just take the course the first time; take it right away before you forget.
The Trustee may issues directives at the 341 meeting. Unless the Trustee issues directive, such as providing copies of tax returns or turning over property, the second course is your step in the case. The court will then issue a discharge within 60-90 days after the meeting. You will receive a copy of the discharge order in the mail from the court. We will also send you an email when we receive a copy, so you will be notified that way as well.
Great! So now we’ve covered everything associated with the 341 meeting. We’ve covered who’s involved, what to wear, what to bring with you, how the meeting is conducted, and what happens after the 341 meeting. If you follow these instructions—particularly with the documents to bring and have them out and available and in the right order—your 341 meeting should run smoothly and you’ll be much more relaxed. We look forward to seeing you then.
One of the most important concerns many of our clients have is how bankruptcy will impact their lease on an apartment of home. This concern arises in one of two scenarios: (1) the client-debtor has arrearages and is filing bankruptcy, at least in part, to avoid paying the past-due rent and perhaps avoid immediate eviction; 0r (2) the client-debtor is current and wants stay in the property. We’ll address each scenario in this article.
I Want to Stay in the rental property
If you want to stay in the rental property, you will have that choice in filing bankruptcy. When your bankruptcy papers are filled out you will indicate whether you want to reject the ongoing obligations of the lease or assume the lease. If you indicate that you want to assume the lease, then the lease terms remains intact and you will be able to remain the property by completing your obligations under the lease i.e. pay rent.
If you have arrearages (past due amounts) and want to stay in the property things get a bit tricky. When you file for bankruptcy, the moment the case is filed with the bankruptcy court, a line is drawn in the sand. All debts that are owed at that moment are subject to the bankruptcy court’s automatic stay. Any debts that arise after the case is filed, however, are not subject to the automatic stay. The automatic stay applies to the pre-petition arrearages, but the landlord can (1) file a motion for relief of the automatic stay and ask the court for permission to evict you unless you bring the arrearages current. If you have arrearages, even if they arose prior to filing for bankruptcy, the court will grant the landlord permission and you will be evicted. That’s because bankruptcy only prevents collection of a debt, but it doesn’t ensure that you remain in the property. In other words bankruptcy doesn’t allow you stay in the property and not pay. The rule of thumb is that if you want to stay in the property, you need to be current or be prepared to bring it current and keep it current.
I Want to Reject the rental property and leave
If you want to reject the rental property and leave you will simply indicate that is your intention when filling out the bankruptcy paperwork. In that case you are not obligated to repay any pre-petition arreraages.
When Will I Have to Leave?
Usually the first question asked after it is established that the client wants to leave the property is when will they be required to leave the property. The simple answer is as soon as possible, but certainly before the next rent payment is due. If you do not vacate the property before the next rent payment is due, you are responsible for the rent payment and that payment will NOT be discharged in your bankruptcy. If you don’t vacate the property the landlord is free to evict you. Under Utah law if the landlord evicts you, you are responsible for triple damages. Again, if that happens, the bankruptcy will not discharge that debt because the obligation arose after filing the bankruptcy case. Because of the substantial damages, you need to be very careful with post-petition rents not being paid.
When Can I Buy A Home After Bankruptcy and Foreclosure?
I was speaking with a friend the other day who about a year ago short sold a home following a job loss and related struggles. She had a short-sale and wanted to know when she could buy a home after bankruptcy and foreclosure or a short sale. Her situation is very common. She short sold her home following a job loss and nearly two years of negotiations with her mortgage lender. During negotiations of the short sale the loan was transferred (which led to the first buyer walking away) and numerous lost documents by the lender.
Eventually after a monumental effort negotiating with her lender the sale was finally approved. She was successful…so she thought. She could have taken the easy road and allowed the home to be foreclosed or filed for bankruptcy. But in her mind a short sale was certainly better than filing for bankruptcy or allowing the home to be foreclosed because it showed a greater sense of responsibility. It showed she was thoughtful and took her responsibilities as a borrower seriously…so she thought. Fast forward to a year later. Now she had stabilized her income and was trying to get pre-qualified for a new mortgage. She had worked hard to improve her credit score since the short sale and while her score wasn’t great, it was in the mid 600s and she felt confident that she could now get a new mortgage with all the advertisements that tout mortgages with credit scores of 500 or better. What a shock and surprise for her to learn that in most cases there is a 3 year waiting period after a short sale! That is the minimum for virtually every underwriter including Fanny Mae, Freddy Mac, & FHA. In fact some are even longer!
How Long After Bankruptcy Do You Have to Wait to Buy a Home?
“Wait a minute! You mean to tell me that if I had filed for bankruptcy instead of spending hours and hours negotiating a short sale I could qualify for a loan, but since I tried to minimize the negative affect on me…and more importantly on the lender I’m being penalized?”, she asked. The mortgage lender said, “essentially, yes. That’s right.” Imagine her bewilderment! Isn’t that upside down, backwards or something? Well yes it is. It is counter-intuitive. There is clearly something wrong with the system when a person takes the extra effort to short sale a property to avoid foreclosure or bankruptcy and she is penalized. To be fair, foreclosure is no better than a short sale as far as waiting period to buy a home. You mean to tell me that a short sale is tantamount (the same as or equal to) a short sale relative to how long you have to wait to get a new mortgage. Yes! The system is what it is. It is simply easier and faster to recover from bankruptcy and buy a home than to recover from a short sale or a foreclosure.
A reaffirmation agreement is an agreement by which the debtor agrees to remain personally liable for a debt post-bankruptcy. A reaffirmation agreement essentially eliminates the benefit of filing for bankruptcy for that one specific debt. Because reaffirming a debt undermines the most basic benefit of filing for bankruptcy, we generally discourage our clients from signing a reaffirmation agreement, unless required to do so by the lender to keep the property. If you are inclined to sign one, you should seek counsel from an experienced bankruptcy lawyer before entering into a reaffirmation agreement.
What is Required to Sign a Reaffirmation Agreement?
If you are represented in your bankruptcy case by a chapter 7 bankruptcy lawyer, the lawyer must review your financial position following bankruptcy and certify to the bankruptcy court that entering into the reaffirmation agreement will not cause an undue financial hardship. If the bankruptcy attorney cannot or will not make that representation to the court, your attorney may need to withdraw from your case (in some jurisdictions like Utah), so that you can represent yourself in the reaffirmation.
Once the agreement is filed with the court, the bankruptcy judge must also approve the agreement.
Why Do We Discourage Reaffirmation Agreements?
As a Salt Lake Bankruptcy lawyer, it is difficult to predict a person’s financial future. Therefore, our experienced bankruptcy lawyers generally discourage our clients from entering into a reaffirmation agreement…unless absolutely necessary. Most secured creditors with whom a reaffirmation agreement would arise arise—automobile lenders—generally allow you to keep the secure property (automobile) without entering into a formal reaffirmation agreement, so long as you keep your payments current. We call this the “pay and retain” method. While a creditor is not legally obligated, our experience is that most secured creditors will agree to the pay and retain method, although more and more creditors are moving away from this option in recent times. While the pay and retain method works well with most secured creditors, there are a minority of creditors who take the extreme position to repossess the secured property even if you are current. America First Credit Union is one of these creditors. In cases that deal with AFCU or other creditors who take the same position, it may be necessary to enter into the reaffirmation agreement in order to retain possession of the secured asset. As mentioned, the best way to ensure that your rights and best interest is protected is to consult with an experienced Salt Lake bankruptcy lawyer.
What About My Mortgage?
We do not see many mortgage companies sending a reaffirmation agreement for consideration. In our experience, we have not dealt with a mortgage company that threatened to foreclose if a reaffirmation agreement was not signed. Judges in our district and in other jurisdictions have indicated that it would be malpractice for an attorney to sign a reaffirmation agreement. As a result, our office will never certify a reaffirmation agreement with a mortgage lender. If your mortgage lender is requiring it to avoid foreclosure (even if you are current), then we will have to take the necessary steps to allow you to proceed pro se.
Are Reaffirmation Agreements Covered by a Flat-Fee Engagement?
Many attorneys do not cover the review and certification of a reaffirmation agreement in their standard flat-fee engagement. Our office follows this practice as well. That’s because in the majority of cases a reaffirmation agreement is unnecessary. Rather than increasing our prices for everyone to cover that possibility, we keep the cost of filing lower and charge a nominal fee when it applies to the case at hand.