Tip of the Day November 20, 2012

Tip of the Day November 20, 2012

Don’t file bankruptcy at the end of the year if you expect an income tax refund. Here in Indiana, you can only keep $350 worth of “intangible personal property” if you file bankruptcy. Intangible personal property is property that has value that you can’t touch. Examples of intangible personal property would be bank accounts, cash, money owed to you and claims you have against insurance companies or individuals who may have harmed you through carelessness. Tangible personal property means things you can touch and put your hands on such as your car, your furniture, your clothes, your golf clubs, your jewelry. The third type of property is called real estate or real property. That is land and permanent improvements attached to land like a house. When you file bankruptcy, you are permitted to keep some of your property. The property you are allowed to keep is called your exempt property. The exemption for intangible personal property is $350 for an individual or $700 for a married couple filing joint bankruptcy. The tax refund you expect to get early next year is considered intangible personal property which means when you get your tax refund, you will only be allowed to keep $350 of it. The bankruptcy courts consider that your tax refund accumulates evenly over the course of the year. That means that on January 2, you have earned 2/366ths of your tax refund (this is leap year so there are 366 days this year). On July 1, you have earned 183/366ths and on December 30 you have earned 365/366ths of your tax refund. So, if you file bankruptcy on December 1 (the 336th day of the year, when you get your tax refund in early 2013, your bankruptcy trustee will want 336/366 of you tax refund (92%).

Now, if you wait to file bankruptcy until after you get your tax refund, you can use part of it to pay your attorney for the bankruptcy and use the rest to catch up bills or pay your car loan down. After the money is spent, then file the bankruptcy. If this happens on March 1 you will only have to pay 2/12ths of your 2013 tax refund (the one you get in early 2014). It may even be that 2/12 of your tax refund is such a small amount that the trustee does not want to bother with it and you get to keep it all.
There is an exception to what I’ve just written and that is that the portion of your tax refund that comes from the Earned Income Credit is exempt. So, the trustee never takes that part of your tax refund from you.

Feel free to call my office if you have questions about timing the filing of bankruptcy. (812) 727-0597

Justin A. Steele

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The Law Office of Justin A. Steele, LLP

Bloomington Bankruptcy
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