Monthly Archives: April 2012

Bankruptcy Law Live Blogging: or, Feeding Your Inner Law Geek

Last week was the annual seminar for the National Association of Consumer Bankruptcy Attorneys, a/k/a law geek heaven.  This year, not only did I attend, but I presented as well.  I have to say that was a bit of a rush.  Anyway, a long time NACBA member and full-fledged law geek live blogged the event.  So, if you are curious about what goes on at these things, well, go take a look Cathy Moran’s Bankruptcy Mastery blog.

Now, if you will excuse me, I must go catch up on the sessions I missed. . . . .


Tax Refunds and the Bankruptcy Estate

Tax refunds present a couple of interesting points in a Bankruptcy filing.  This post is concerned with Chapter 7 filings.  Chapter 13 is a little bit different for a couple of reasons.  This is also rooted in Oklahoma law, and although the theory remains the same, the results can be very different in other States. 

When talking about tax refunds with my clients, the first thing I have to do is figure out exactly what we are talking about.  I long ago stopped asking my clients and just started looking at their most recent returns.  Clients tend to refer to that check they receive from the IRS (or electronic credit) as their tax refund, although in many cases, it is all kinds of other things.  A tax refund is literally the refund of money that the tax payer overpaid to the IRS during the course of the year.  Various tax credits are paid along with the refund, but they are money given, or credited, to the tax payer by the Government.  Some common tax credits are Earned Income Credit, Child Care Credit and recently the Making Work Pay Credit.  Those are not a tax refund, those are tax credits.  At this point my clients are generally rolling their eyes and muttering, “Whatever” under their breath thinking I can’t hear them.  Then, I get their attention.

You see, tax refunds are not exempt in Oklahoma.  That means that any tax refund that has accrued to a debtor at the time he files for bankruptcy becomes property of his bankruptcy estate — meaning his Bankruptcy Trustee gets the money, and the debtor doesn’t.  Earned Income Credit, however, is exempt; and the Debtor gets to keep that money.  It is about this point that eyes stop rolling and clients’ posture visibly improves. 

Let me explain.  A Chapter 7 Bankruptcy is a deal.  The Debtor agrees that if he has any non-exempt property that the Trustee wants to administer for the benefit of his creditors, the Debtor will put it on the front porch with a red bow on it for the Trustee to come get — and BE HAPPY ABOUT IT.  In exchange, the Debtor gets a discharge — meaning he gets out of the debt that brought him to my office in the first place.  If that deal isn’t worth doing, then don’t file a Chapter 7 Bankruptcy.  Now, in most cases my clients lose no property, because the list of property that you get to keep in Oklahoma (exempt property) is really very generous.  Most people who file in Oklahoma lose nothing but a whole bunch of ugly debt they didn’t want in the first place, but the most commonly lost asset in Oklahoma is a tax refund — because tax refunds are not exempt.  Earned Income Credit, however, is exempt; and so the Debtor gets to keep that.  Ah, yes, focused attention. 

Now, I am posting this in April — tax time; but this is a relevant topic all year.  Here’s why.  Any time a bankruptcy is filed, the Debtor creates what is called a Bankruptcy Estate, and he gives to that Estate everything he owns and everything he owes.  Then, the Debtor takes back all property that he is claiming as exempt.  The goal is to leave as much debt as possible trapped in the Bankruptcy Estate and as little property as possible.  The Debtor can take back his Earned Income Credit.  He cannot take back his overpaid taxes, those are trapped in his estate and belong to his Trustee to pay to his Creditors. 

Notice, that last sentence refers to overpaid taxes, not specifically to a tax refund.  That is why this is an issue that is relevant all year.  Let’s assume that a client is expecting a $4,800 tax refund.  That means he has overpaid his taxes at the rate of $400 a month ($400 x 12 = $4,800).  If he files for Bankruptcy on January 1, he will have overpaid to the IRS the whole $4,800.  Now, he probably can’t file his taxes and claim it for at least another month or two; but he is owed that money even though he doesn’t have it yet.  His right to that money passes into his estate the instant he files his Bankruptcy.  That means when he does file his tax return, that entire refund will belong to his Trustee for the benefit of his creditors — all $4,800 of it.  Ouch. 

Now, let’s assume that this same person files on July 1 rather than January 1.  At that point he will have overpaid his taxes by $2,400 (January – June = 6 months x $400 = $2,400).  Even though he can’t claim that money for another seven or eight months, he is entitled to it.  Think of this as a savings account that you could only withdraw from after the first of the year.  You still are entitled to the money you deposit, you just might have to wait a while to get it.  Well, your Trustee can wait a while too.  So, in this set of facts, if the Debtor files for Bankruptcy July 1 and gets a $4,800 tax refund the following February or March, he will be entitled to keep the excess, or refund, that he paid in after he filed his Bankruptcy on July 1.  The Trustee will be entitled to the excess paid in before July 1. However, to the extent that refund is Earned Income Credit rather than tax refund, the Debtor gets to keep it all, regardless of when he filed.

This illustrates several significant concepts central to the Bankruptcy system:  1.The nature of the Bankruptcy Estate; 2. The inclusion in the Estate of accrued interests in property; 3. The difference between exempt and non-exempt property, and how technical that distinction can appear to be; and 4. The role of the Trustee.

Of course, the moral of this story is don’t file a Bankruptcy shortly after the first of the year until your tax refund is back and spent.  Do, however, talk to an attorney in advance, however.  There are ways you can spend a tax refund right before you file that can cause bigger problems.  As this post should have pointed out, Bankruptcy is a complex and technical area of law, and there can be significant ramifications to deceptively routine transactions. 


Between a Divorce and a Hard Place

There are some phone calls I really hate getting.

One of my least favorites goes like this:  I need to file for bankruptcy, because I was ordered to pay my ex’s lawyer in our divorce; and I can’t pay $xx,xxx by Monday.

There are three problems with that sentence.  First, the waiting until the week before (or day before) a court hearing to call a lawyer is just a bad idea.  Almost without exception lawyers are going to want a whole week or maybe even two to handle almost any kind of problem for you.

Second, debt included in a divorce decree is bad news, and a Bankruptcy will probably not do what you want it to do.  In fact, a Chapter 7 bankruptcy will do almost nothing with respect to debt you were ordered to pay in a divorce decree.  There are exceptions, so do check before jumping to conclusions.  For instance, you can discharge a debt to Chase Visa, but you cannot discharge an obligation to protect your ex-spouse from Chase Visa.  So, if Chase goes after the ex-spouse, a Chapter 7 discharge won’t do much for you, although the automatic stay will buy you a few months of peace.  This is complicated, and there are almost always exceptions, so make the call, anyway.  There is always a Chapter 13 Bankruptcy which does have more ability to deal with divorce related debt, and it gives you another chance to take control of the fight.

The third problem is, of course, a five-digit attorney fee award.  You and your ex need to control your divorce — not the lawyers.  Pick your fights, and no matter who is paying your ex’s fees (and in this case, the prospective client was going to be), nobody wants to pay five digits to a divorce lawyer just because the fight is so much fun.  Find another way.  I’ve sometimes wondered if a weekly session of laser tag wouldn’t do wonders for divorce clients.  Beat the snot out of each other for an hour for $60 and you don’t have to talk to each other.  I think it is a great idea.  The divorce bar remains unconvinced.

Ok, rant off.

Sometimes, the best solution for someone with divorce debt is to file a Chapter 13 Bankruptcy, assume that most, if not all, of the divorce debt is going to have to be paid, take a full five years to get it paid and at least stop the interest, the threats, the court dates, the fee escalation and the fear.  For some callers the result is better.  For others, it isn’t.  For some callers what I can offer is enough.  For some callers there is a better solution, but more often than not, my answer won’t be what the caller wants to hear.  So, I really hate those calls.


Foreclosures and What on Earth does “In Personam” Mean Anyway?

I get to sue a mortgage company.  That always makes for a good Monday.  Here are the facts.  Woman files for Bankruptcy.  She gives her house back to the lender in the Bankruptcy.  She moves out and moves on.  Lender has to obtain clean title to the house, so the Lender files a foreclosure action.  Lender screws up.  Lender is getting sued. 

The rest of the details.  Yes, at least in Oklahoma, the lender is supposed to foreclose on the house; but the lender is only supposed to seek a judgment against the house — or, to use the fancy, Latin, legal phrase — in rem (against the property).  Instead, this lender filed its foreclosure action and sought a judgment in rem (against the property), but also sought a judgment against my client, or in personam (against the person).  So, this foreclosure petition is asking for the property AND the right to pursue my client for money if the house doesn’t sell for enough to pay the total amount due.  That is the problem.

You see, when my client filed for Bankruptcy, she got a discharge.  A discharge is the reason you file for Bankruptcy.  It is what gets you out of all that debt that caused you to file in the first place.  A discharge is a Court Order that means that none of the people that the Debtor owed money to at the time that the Debtor filed for Bankruptcy can ever try to make the Debtor pay them again.  That means no collection calls, no bills in the mail, no nasty letters, no lawsuits and NO in personam liability in a foreclosure. 

Sure, the foreclosure needed to be filed.  In the Petition it should have mentioned the Bankruptcy filing and then said that the lender was seeking the property only, and not seeking a personal judgment against my client.  This one didn’t do that.  Some weeks I really like Mondays.