Many clients inquire about their potential tax returns or tax returns that have been refunded to clients intending to file bankruptcy. Specifically, clients ask if they are required to forfeit their tax returns if filing for a Chapter 7. The answer is dynamic and cannot be answered by a YES or NO as it depends on the client’s assets and available exemptions.
First, a client must actually qualify for a Chapter 7 Bankruptcy. Many clients or potential clients falsely assume they can simply file and obtain a Chapter 7 Bankruptcy when they wish. However, due to recent changes in the Bankruptcy Code in 2005, qualifying for a chapter 7 is more difficult. During the appointment with the Client I will first review the assets, liabilities, income and expenses of the Client to determine whether he/she qualifies for Chapter 7. Refer to my previous blog posts regarding qualifying for Chapter 7 bankruptcy relief. Here, we will assume the Client does.
The next step in determining whether a Client who qualifies for Chapter 7 bankruptcy relief can keep their tax refund they received or will receive requires obtaining a comprehensive list of all assets, liabilities, and equity in personal property. Assets include such items as: real property, bank accounts, cash, stocks, retirement accounts, vehicles, boats, home furnishings, etc. Liabilities include such debts as: mortgages, secured loans (i.e. vehicle loans), non-dischargeable debt (i.e. student loans), etc. Equity in each item is then calculated.
The final step in determining whether a Client who qualifies for Chapter 7 bankruptcy relief can keep their tax refund they received or will receive requires applying one of two exemption systems permitted for California Clients to the Client’s assets and any equity thereof. Depending on the amount of assets, type of assets, equity, amount of equity, various can be used. Typically, if a Client does NOT have equity in real property, exemptions can be used to protect significant personal property such as tax refunds.
This step in the process is extremely complex and requires the expertise of a knowledgably bankruptcy attorney. Applying the incorrect exemptions will cause a Client to lose the asset to the Trustee. Further, once a Client files for Chapter 7, realistically there is no “going back” and “cancelling” or stopping the process. Many unknowing clients become entangled with paralegals or unknowledgeable attorneys under the assumption they are saving in legal fees, however the errors incurred by the prepare results in costing the client more due to the property loss.
Filing for bankruptcy is a complex process and requires proper planning to determine whether it is best for you. 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 the bankruptcy. More so, I make it my goal to properly review and analyze the client’s assets, liabilities, and equity in such assets to select the most efficient exemptions or to simple advise the client of risks of losing certain assets
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