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11

Oct 2010

Don't file bankruptcy until March if you get a big refund.

Posted by / in Virginia Bankruptcy / 11 comments

This time of year, you need to be very careful about filing bankruptcy in Virginia if you get big tax refunds.  Why?

Virginia law has a lifetime $5000.00 limit on how much cash you can have when you file bankruptcy, and your refund counts against that.  If you file bankruptcy in October, November, or December, the bankruptcy trustee is going to look at last year’s tax return and see how much money you got back.  Hummm.  If it’s any where near $5000.00, he’ll hold your case open and ask to see the 2010 return.

If that refund puts you over the cash limit, he’ll grab it.  Another reason this is a big problem is because Virginia only allows you equity in your car up to $2000.00.  That’s right, the Virginia General Assembly thinks the bankruptcy court should take your paid for car if its worth $2000.00.    (When I graduated from high school a brand new Volkswagen cost $1995.  But that was a LONG time ago.)

You can use your cash limit to protect a car that’s worth a little more, but that leaves the tax refund hanging out.

Darden Hutson and Mitch Goldstein, two excellent bankruptcy lawyers in Richmond, Virginia, are spearheading an effort to raise these limits.   But for now, they are what they are.

Now, there are two reason people get big tax refunds.  Some people get a big refund, because they pay big taxes–they over withhold.  If you are one of those people and you want to go ahead with your bankruptcy now, you should contact your payroll office and increase your exemptions to twelve.   Right, like you have twelve children.  (Both state and federal.)

That will cut to almost nothing the taxes you pay for the rest of the year–and we hope it sopps up enough of the refund that you stay under the cash limits.

Other people get a big refund because of the earned income credit.   The earned income credit is basically a boost that the federal government gives to families with children where the parents are working but not making much.   This was originally put in by Richard Nixon and increased several times over the years, including by Ronald Reagan.

Increasing your depedents to 12 won’t help people who get a big refund because of the earned income credit.  That’s because the refund is based on the number of children and the income–its not really based on what taxes were actually paid.

Unless there’s some real emergency, people who get an earned income credit should not file bankruptcy in Virginia after August.  Otherwise the money the federal government is giving to help your children will end up in the hands of the bankruptcy trustee.

Why am I saying file bankruptcy in March?  File your taxes as soon as you can in February and get that money in and spend it.  Don’t just throw it away–and you can’t bury it in your backyard or give it to your brother–but spend it on things the kids have been needing, probably since last year.

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Robert Weed has helped twelve thousand people file bankruptcy in Northern Virginia. Robert Weed is a frequent panelist and speaker at the meetings of the National Association of Consumer Bankruptcy Attorneys. He is one of Northern Virginia’s most experienced personal bankruptcy lawyers. As an expert on changing consumer bankruptcy laws, Robert Weed has been interviewed on local and national TV and quoted in newspapers across the country.

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11 comments
  • Robert Weed

    Robert Weed

    January 8, 2012, pm31 5:27 PM
    01

    The car limit did get raised to $6000, which helps a lot. But the $5000 cash limit is still an issue for people who get big refunds.

  • Sean A.

    September 29, 2012, pm30 9:14 PM
    02

    Is the cash limit cumulative on all cars you may own, such that if you have three cars with a total worth of $6001, would they take all three?

  • Sean A.

    September 29, 2012, pm30 9:15 PM
    03

    ..sorry I meant “car limit” not “cash limit”

  • Rashida C

    January 3, 2013, pm31 8:38 PM
    04

    I am worried about this very thing since I am serious thinking about filing for Chapter 7. I don’t have any assets that I want to or can save, my rental property is upside down, credit cards behind and student loans. They only thing I would have is a retirement account and possibly a sizable tax refund as a result of claiming a big loss on the rental property. I was counting on this money to get us through the next couple of months, for rent and utilities, moving expenses, etc. Pretty much to set us up to sustain life for the next few months since we’ll have to find a new place to live. Other than retirement accounts and one car (which is current but not worth much), we don’t have any assets. Should I file taxes before filing for bankruptcy?

    • Robert Weed

      January 4, 2013, pm31 3:31 PM
      05

      Rashida:

      You need to CALCULATE your taxes and then you need to talk to your bankruptcy lawyer to decide what to do. Not filing is rarely a good idea–not KNOWING is never a good idea. But you and your lawyer need to understand your complete picture before deciding the best thing to do.

  • Kblades

    January 28, 2013, pm31 6:39 PM
    06

    I filed chapter 7 bankruptcy back in Oct, 2012 . The trustee told me once I file my federal and state returns to send him copies of all documents. Including my refund checks so that he can determine what portions will go to my creditors. My lawyer was able to protect $5000.00 of my assets. I also have dependents and he said that he can protect an additional $500.00 per dependent. I do trust my lawyer. But I have to wonder.. Why take my refund if the main reason for me filing bankruptcy was to get a fresh start.

    • Robert Weed

      January 28, 2013, pm31 7:33 PM
      07

      K:

      The trustee’s job is to take your refund and pay creditors if legally he’s allowed to–that’s his job. Your lawyer’s job is to help you plan so that there’s nothing the trustee is allowed to take. Usually that take a little planning.. But sometimes there’s no time to do any.

      Your experience points out two things. First, see your lawyer soon enough that there’s time to plan or make adjustments if you need to. And second, get a lawyer who takes the time with you to plan and make adjustments.

  • Kblades

    January 28, 2013, pm31 10:12 PM
    08

    Thanks

  • Stephanie

    February 16, 2013, pm28 10:29 PM
    09

    Mr. Weed,
    My husband and I filed chapter 7 on August 16, 2012. It was discharged on November 14, 2012. Our attorney protected up to $2,200.00 for our tax refund, which is the most we ever normally received. We did our taxes online but have yet to submit them because our refund will be right at $9,000.00 this year due to receiving earned income credit and child tax credits. We lost over $20,000 in income when my husband became disabled, and now fall into the category eligible for the EIC. Will our refund be taken or are we safe since it has now been six months from filing? Thank you in advance for your help!

    • Robert Weed

      February 17, 2013, am28 9:57 AM
      10

      Stephanie:

      That’s a very tricky question.

      First of all, did the trustee ask you to send the tax forms when you filed them–if the trustee asked, then you have to cooperate. And you are going to lose some of the refund.

      But if there was no request at the time, then here’s what I see.

      In August you didn’t have the whole $9000 coming because the year wasn’t over. You may have had around $5000. You put down $2200 on your forms so you were ALMOST half of what ti turned out to be. Was that a lie? Well, you believed it and you weren’t off by that much.

      So, your case is over (assuming it is). You made an honest math mistake but not an enormous one. Do you have an obligation to correct that mistake? I don’t know what the judge where you are would say about that…

      There’s no advantage to not filing the forms with the IRS.

  • Stephanie

    February 17, 2013, pm28 8:23 PM
    11

    Mr. Weed,

    Thank you for your response. The trustee made no mention of us sending him our tax information. All he said was if we inherited any money, we would have to let him know if it were within six months. Our attorney said he would protect our tax return up to $2,200 as that was the most we had ever received on a refund. We never expected to receive a refund so large. We have yet to submit it because we wanted to make sure that we were past the 6 month filing date. It was 6 months yesterday. Should we wait till March? Or just file and see what happens? Thanks again!

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