Tax refunds: Can I keep the money?

Short answer: No.
If you file bankruptcy while waiting for a refund, or before you have even filed a return for a past year, the Trustee will take it. Two notes about that:

1) It's a one-time thing. What is really happening is, the bankruptcy estate is created at the moment you file the case in court. So it is in effect a financial "snapshot" of your situation at that moment. If you are owed a refund - even for a tax year that was years before, and even if you don't know how much it is because you haven't prepared your return yet - the bankruptcy trustee will take it. But you don't keep giving up future refunds.
2) There is a simple solution: file the return, receive the refund and spend it before filing. Ask legal counsel what types of uses of excess money are appropriate. Many are not.
Please see my video, linked above, for my description of this.

When Is Bankruptcy an Option?

"Who can file for Bankruptcy" and "How do I know if Bankruptcy is right for me?"  These are two common questions that many of our clients have before they come in to meet with us.  Common misconceptions about Bankruptcy have caused some of our clients to unnecessarily carry a lot of stress and undue hardship, for long periods of time.  Bankruptcy is a big step; it should be treated in a flippant manner, but for many it is a good, and sometimes the best, option.

So, to our first question, "Who can file for Bankruptcy?"  The answer - practically anyone can.  So long as a person has debt and a social security number (which is not needed if the filing party is a corporate body of some sort), then that person can file for bankruptcy.  Now, that doesn't mean that Chapter 7 (liquidation), and Chapters 13 and 11 (reorganization) don't have limits and qualifications, but Bankruptcy is always an option, though not always the best one to choose.

If you go in the right direction,
there IS light at the end of the tunnel!

To our last question then, "How do I know if Bankruptcy is right for me?"  As a general rule, if a person's unsecured debt (credit card, medical bills, etc.) equal or exceed their annual income, it is probably time to talk.  When you are looking at that sort of debt/income ratio, digging your way out could take decades without a fundamental change to income and expenses.  However, often times our clients are forced to consider Bankruptcy, after their creditors start to severely impact their lives.  Many people cannot afford to have their wages garnished, or their bank accounts levied.  Others simply want the phone calls and the stress to stop.  It is fairly typical to meet many of our clients after they've been sued, their homes are being foreclosed, or they are just flat out of money.

If you are trying to figure out what options are available to you, you can't afford wage garnishment/bank levies, or you just can't take the creditor calls anymore, then let's talk.  We can set you on the path to financial recovery.  As always, there is no charge for a Bankruptcy consultation.

Changes to the Means Test

Most people that file for bankruptcy end up filing either Chapter 13, or Chapter 7.  Chapter 13 bankruptcy is referred to as a "reorganization."  It consists of a monthly repayment plan which lasts for 3-5 years.  Once the repayment plan is complete, the debtor gets a discharge and the Chapter 13 in concluded.  However, the situation is very different in Chapter 7.  A Chapter 7 case usually lasts 5-6 months, before the discharge is granted and no repayment plan is required. 

The vast majority of cases filed by Clint W. Smith, P.C., are Chapter 7 cases.  Why?  Chapter 7 is cheaper and easier for the debtor.  Yes, Chapter 13 cases can be helpful and there are some really neat things that can be done in a Chapter 13 that can't be done in a Chapter 7, but Chapter 13 is only right for a specific type of client.

However, not everyone qualifies for Chapter 7.  In order to qualify for Chapter 7, you must pass the "Means Test."  Part of that test includes an analysis of your yearly income.  This analysis is based on the "Arizona Census Median Income", based on household size.  If your income is above, then it becomes harder to qualify for Chapter 7.  If your income is below the average, then most of our clients do not have any issues qualifying for Chapter 7.

Effective November 1, 2011, the Arizona Census Median Income is changing and here is how it looks:

1 Person ($41,385); 2 People ($53,781); 3 People ($56,508); 4 People ($61,267); 5 People ($68,767); 6 People ($76,267); 7 People ($83,767); 8 People ($91,267); Each Additional Person in Household ($7,500)

From the above, if you are a single person making $41,385 or less per year (gross), then you will likely qualify for Chapter 7.  If you have a household of 6 people and you make $76,267 or less per year (gross), the you will likely qualify for Chapter 7, and so on.

If you would like to discuss your situation and how bankruptcy or debt-settlement might affect your situation, please give us a call.  We'd love to see if we can help.

Tools of the Trade

From a handyman or plumber...

Whenever a person files for bankruptcy, they get to keep certain property, while other property must be turned over to the Bankruptcy Court.  Whether or not a person gets to keep a certain type or amount of property depends on whether or not it is exempt.  This is what is meant by the word "Exemptions."  In the State of Arizona, exemptions are granted by statute (written law).

Today, we want to touch on the "Tools of the Trade" exemption.  Arizona's "Tools of the Trade" exemption is written in A.R.S. Section 33-1130.  Here is the language:


...to a hairdresser,
the "Tools of the Trade"
exemption may protect your
ability to make a living!

"The following tools and equipment of a debtor used in a commercial activity, trade, business or profession shall be exempt from process:

1. The tools, equipment, instruments and books of a debtor or the spouse of a debtor primarily used in, and necessary to carry on, the commercial activity, trade, business or profession of the debtor or the debtor's spouse, not in excess of an aggregate fair market value of two thousand five hundred dollars. For the purpose of this paragraph, "tools" do not include a motor vehicle primarily used by a debtor for personal, family or household purposes such as transportation to and from the debtor's place of employment.

2. Farm machinery, utensils, implements of husbandry, feed, seed, grain and animals not in excess of an aggregate value of two thousand five hundred dollars belonging to a debtor whose primary income is derived from farming.


3. All arms, uniforms and accoutrements required by law to be kept by a debtor."

Obviously, sections 2 and 3 above will not apply to most people, since farmers/ranchers/law enforcement are fairly specific types of employment.  However, it is important to note that there are specific Tools of the Trade exemptions available to them, and no one else.

For most people using the Tools of the Trade exemption, section 1 above becomes very important.



Here's the short of it...  If a person files for bankruptcy and they own their own business, that person can protect $2,500 worth (garage sale value) of any tools, equipment, instruments and books that are primarily used, and necessary, to that business.  The exemption increases to $5,000 worth of tools, if the debtor is married, since the debtor's spouse gets an exemption as well. 

It is important to realize that the Tools of the Trade exemption does NOT apply to a vehicle that is primarily used for household purposes, such as driving to and from work.



Whether you're a handyman, a hairdresser, or anything in between, you may be able to protect your "Tools of the Trade" if you need to file for bankruptcy.  If you have questions, and you would like to discuss your situation with us, please give us a call to set up your free bankruptcy consultation.

Your Car and Redemption!

When most people start the process of considering bankruptcy, they generally have two initial concerns: (1) what happens to my house?; and (2) what happens with my car?  This is why several of our prior posts deal with homes and cars.

For today's topic, we return to cars, and one option that is available to those who file for Chapter 7 Bankruptcy.  It is called "Redemption".  Dictionary.com defines Redemption as "to repurchase, as of something sold."  That definition holds true in a bankruptcy context. 

Section 722 of the Bankruptcy Code states: "An individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption."

So, what does this mean?  It means, if you use an exemption to protect some personal asset, such as a car, appliance, or furniture, and that property has a lien against it, then you can pay the lender for the value of that property and keep it through a bankruptcy.

You're chances go up,
if you have red hair.

Here's an example - Let's say you own a car with a $10,000.00 loan on it, which you protect with your automobile exemption, but the car is only worth $5,000.00.  In a Chapter 7, you can pay your lender $5,000.00 to keep the car and the prior loan gets discharged.  This sounds like quite a deal, but keep in mind that $5,000.00 needs to be paid in one lump sum.  

Where would one come up with $5,000.00?  Here are a few options: (i) get a loan from a relative or friend, (ii) pull funds from an exempt retirement account, (iii) sell exempt assets, or (iv) get a new loan to pay off the car, based on what the car is actually worth, not what you owe.  If you don't have Daddy Warbucks as a family member or friend, then you might be wondering who on earth would give you a loan when you've just filed for bankruptcy.  Good question, but there's an answer - 722Redemption.com.

722Redemption.com is a company (backed by US Bank) that will work with you, us as your BK attorneys, and your current lender to "redeem" your vehicle.  Keep in mind that their willingness to issue the loan comes at a higher interest rate (often in the 20% -25% rage), so these types of redemption loans do not always make good financial sense.

If you have any questions about redemption, or how it might benefit you, please give us a call to set up your free consultation today!