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