Arizona and Federal Taxes and Bankruptcy
It’s the most wonderful time of the year, TAX SEASON!! See lawyers can have a sense of humor too! Tis true it is time to deal with taxes. As we all know there are 2 things that we all absolutely, without fail, no if ands or maybes, no way around it, must do….die and pay those dreaded taxes. It is our monetary thank you to the wonderful State of Arizona and this great country, in allowing us to all share in the dream.
What happens to your Arizona and Federal tax returns in an Arizona Chapter 7 or Chapter 13 Bankruptcy? The tips I will give you will allow you to properly prepare your tax filing, spending of the Arizona refunds and federal refunds, and file your Arizona Bankruptcy.
In a Phoenix, Arizona Chapter 7 or Chapter 13 Bankruptcy, if you receive your prior years tax refund, State AND Federal, after you file your Bankruptcy, 100% of the refund will go to the Bankruptcy estate. For example, if you file your Chapter 7 Bankruptcy on March 1, 2011 and receive your 2010 Arizona tax refund on March 5, 2011 and your 2010 Federal refund on March 10, your Bankruptcy Trustee will take 100% of the refund, both state and federal. It is imperative that you properly time your Arizona Bankruptcy filing around your tax refunds.
Ideally, you will file your Arizona taxes and Federal taxes, get the refunds, use the money on “reasonable and necessary” living expenses (food, gas, clothing, rent, bills, etc.), then file your Arizona Chapter 7 or Chapter 13 Bankruptcy. You definitely do not want to use the money to pay back friends or family members, do not buy luxury/non-exempt items such as big screen tvs and jewelry, and you can not “hide” the money (the trustee’s will find it).
Wait it gets a bit more complicated, I know you’re excited. You must forfeit a portion of the Arizona and Federal tax refunds for the year you file your Bankruptcy. For example, if you file your Arizona Chapter 7 or Chapter 13 Bankruptcy in March of 2011, you must send to the Bankruptcy Trustee a file stamped copy of your 2011 tax return (yup that’s right, when you file the taxes in 2012). The pre-bankruptcy filing portion of your Arizona and Federal taxes are property of your Bankruptcy estate. So in our example, since you filed your Arizona Bankruptcy in March of 2011, 25% of the 2011 tax refund is property of the Bankruptcy estate (aka the Bankruptcy Trustee will take 25% of the total refund). In a Phoenix Arizona Chapter 13 Bankruptcy, you must turn over your refund for every year you are in Bankruptcy (Chapter 13 Bankruptcies are typically 3 to 5 years).
So what happens if you get a refund from one and owe on another? You are still responsible for turning over any tax refund to the Bankruptcy Trustee. However, we tell our Chapter 7 and Chapter 13 clients to inform the Trustees that the refund will offset the liability. Usually, the trustees are ok with this and will allow you to use the refund to pay what you owe, but there are no guarantees so make sure to discuss this with your Phoenix Arizona Bankruptcy Lawyer.
During one of my days volunteering at the Phoenix Arizona Bankruptcy Court Self-help Center, a single mother of 3 came in and told me her Bankruptcy Attorney filed her Chapter 7 Bankruptcy before she received her $7,000 state and federal tax refunds. You guessed it, the Bankruptcy Trustee took all $7,000. This was money she could have used to pay child care expenses, pay rent, pay bills, take care of her family. My heart broke as I had to tell her that there was no way of getting this money back, and that she needed to speak to her Phoenix Arizona Chapter 7 Bankruptcy Lawyer. As she sat there in tears, I thought to myself how negligent her Bankruptcy Attorney was, and how easy it would have been to avoid her losing her tax refund.
This is a very confusing yet VERY important subject in a Chapter 7 or Chapter 13 Bankruptcy. If you have any further questions or concerns regarding Arizona and Federal taxes and Bankruptcy please call us at (480) 540-3815.