Your tax returns and potential bankruptcy filing are invariably connected.  Your tax returns from previous years are used as evidence of your adjusted gross income and are provided to the trustee in bankruptcy before your meeting of creditors.  Taxes deducted from your paycheck are not counted as income for purpose of the Schedule I income calculation; this is important in a Chapter 7 where your monthly expenses must exceed your income and in a Chapter 13 where Schedule I might be used in calculating your plan payment.

Any tax refund you might receive affects and is affected by your bankruptcy as well.  In a Chapter 7, your refund is property of the estate and is subject to seizure if it is received within 90 days before filing or up to 180 days after discharge.  If it is not received in that period, the policy here in the Eastern District of Michigan is that it still has to be prorated and exempted.  The problem is that if you have to exempt a large tax return using the “wildcard” exemption, your attorney may be unable to exempt other assets as well.  Even more concerning is the case of the debtor that has equity to exempt; the “wildcard” exemption may not even be available to that debtor and the trustee will take the tax return.  In a Chapter 7, if you can plan a little ahead, you can prevent this money from being used to repay your creditors:

1. If you have no home equity to exempt, and little in the way of other assets, don’t worry, your tax refund will probably be exempt.
2. If you have home equity, or a large number of other assets that are not exempt under another category, you may need to preserve your “wildcard.”  If your Schedule I (income) is not in danger of exceeding your Schedule J (expenses) all you need to do is fill out a new W-4 and increase the number of exemptions you are taking.  While you won’t get a large check come tax time, you will notice an increase in your take-home pay.

Your tax refund amount matters less if you do not qualify for a Chapter 7 and file Chapter 13 instead because that money will likely end up with the trustee, for the benefit of creditors, no matter what.  The reason behind this is that if you decrease your monthly taxes, your Disposable Monthly Income (“DMI”), and thus your plan payment will most likely go up.  If you choose to leave it alone and receive a refund, you’ve most likely got to turn it over to the trustee anyway.

While the content of this article are legal in nature, and the author is an attorney licensed to practice in Michigan, this is opinion only.  You should consult with your own attorney before acting on any advice or, call us today at (248) 595-8617 for a free consultation.

The question then becomes; what can we do about this?  When formulating a strategy, I had to remind myself what the attorney’s role in a Chapter 7 Bankruptcy is.  It is my opinion that the consumer bankruptcy attorney exists to act as an intermediary between the debtor, the creditors, the court and the trustee.  To provide the best service to the client then, it is often necessary to play the payday loan company’s game and fax the Notice of Filing accompanied, of course, by a cease and desist letter full of thinly veiled threats to file a Motion for an Order to Show Cause why the should not be held in contempt for violating the automatic stay if they don’t cut it out.

Sometimes though, it is necessary to become more aggressive.  I have discovered there are a variety of tools available on the internet that allow me to find out who and where these companies are.  The client can usually provide a telephone number of a creditor who contacts them which I enter into www.whocalled.us which gives me an idea of who the creditor is and where they called from.  The next step is to search the Department of Labor and Economic Growth (or other state equivalent) website to find the company’s address, real name, and registered agent.  Armed with this information I have been able to get the company to agree to stop calling and taking payments from my clients with a simple phone call to their customer service and a follow-up letter.

Two things to keep in mind as you encounter similar scenarios:

1. If you are an attorney, you are governed by your state’s Rules of Professional Conduct.  These rules govern how you must conduct yourself when negotiating on behalf of a client and how you may interact with a non-attorney; the other side is often not governed by the same rules so make sure you follow them even if they don’t.

2. Your goal should be to provide the best product to your client, this is a business model that is often covered up by attorneys’ egos.  By playing by the rules the payday advance companies demand, you are better serving your client by eliminating the harassment and payments that they came to you to prevent.