The two most common questions I get asked by bankruptcy clients in cities which I serve such as, Whittier, La Habra, La Palma, and La Mirada during tax season, are:
Depends on a few factors:
Chapter 7 or Chapter 13
Many clients prefer to file for Chapter 7 over 13. The main reason being Chapter 7 discharges a debtor’s debts unlike a Chapter 13 where the debtor must make repay the debt over the course of five (5) years. Refer to my blog prior regarding the difference between Chapter 7 and Chapter 13 bankruptcies for further information.
In a Chapter 7, a client will be able to use their exemptions to protect certain assets such as tax returns. In a Chapter 13, if the debtor is not on a 100% repayment plan, the debtor most likely will be required to “pledge” all tax returns during the five year repayment period to the trustee, and thus will not be able to use their tax returns.
A debtor’s assets determine what exemption system to use. In California, two are available: 703 and 704. Very briefly, 704 exemptions are mainly used to protect equity in a debtor’s home. Conversely, 703 exemptions are used to protect the personal property a debtor may have using “wild card” exemptions. The logic behind the 703 exemptions are a debtor elects not to use the 704 exemption to protect the equity in the debtor’s house (assuming equity exists), and therefore, the exemptions can be applied to personal property instead (i.e. cash, tax returns, boats). Therefore, if a debtor can use the 703 exemptions and not the 704, the debtor should be able to protect the tax returns so long as sufficient exemptions remain (see next section). For further information as to the difference between 703 and 704, refer to my previous blog.
Are there sufficient exemptions?
The 703 exemptions, “wild card” exemption, is not infinite. In fact, its roughly $24,000 and increases yearly. The exemption is intended to cover such personal property as cash, savings accounts, tax returns, and to provide supplemental exemption for excess equity in such as things as:
The above list of exemptions that the wild card exemption can be applied to is not the complete list, but it should serve as an idea of how the 703 wild card exemption can be used to protect tax returns.
In sum, tax returns provide immediate relief to many in a financial crunch. Many debtors count it. Due to the importance of receiving tax returns, debtors should strive to protect it when filing bankruptcy.
A competent and knowledgeable bankruptcy attorney who understands the various exemption systems and how to properly allocate the exemptions amongst a debtor’s assets will be able to efficiently protect a debtor’s tax returns. Thus, it is crucial that you select a highly skilled bankruptcy attorney. I make it my goal to provide each client the dedicated time and experience to assist the client with his/her bankruptcy.
I proudly serve Orange County, Riverside County, San Bernardino County, and Los Angeles County. My office is located in the City of Brea, which provides convenient commuting time from surrounding cities such as Fullerton, La Habra, La Palma, Placentia. La Mirada, Norwalk, Diamond Bar, West Covina, Pomona, Anaheim, Orange, Buena Park, Santa Ana, Anaheim Hills, Cerritos, Yorba Linda, and Whittier.
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