Spouse and I filed joint bk ch. 7, Our attorney filed for our house(currently in foreclosure, and rate mod with BoA) as exempt. And our family car that we still pay on, but current. I received a letter from the bk trustee, stating that any and all refunds from the fed and state must be forwarded over to the estate. How is it possible, that a couple with two kids, that qualify for several financial assistance programs, that have only one income that is very low, experienced layoffs etc. THE WHOLE REASON FOR FILING THE BK, has to turn over paid taxes, child credits etc. to the trustee? If we clearly have no money, and what does come in as disposable goes to only necessary bills, how does the court expect us to climb back up? The return was not major, but to us it was a breather for 2-3 month
The legal terminology is exemptions. Exemptions are things you are allowed to keep when you file chapter 7 and the law is very specific. In California, if you have substantial equity (value exceeds loan balance) in your home you would not be allowed to keep a tax refund. Most people in foreclosure owe more than their house is worth which means they have no equity. If you owe more than your house is worth then California law allows you to keep up to $26,775 worth of cars, non-retirement accounts, claims and/or tax refunds. That means your other assets can directly impact whether you can keep a tax refund. Also, some of our local chapter 7 trustees (including John Kendall) routinely send form letters asking for tax refunds even if they are not entitled to keep the refund.
Law Office of Michael J. Primus We are a debt relief agency and help people file for bankruptcy under the bankruptcy laws. We have offices in California only.
Luckily, a California bankruptcy attorney has told you the score on what California exemptions allow. The short answer to your question, though, is that the bankruptcy process attempts to balance the needs of debtors for a fresh start with the contractual rights of creditors. You are, after all, in debt to people who expected to be paid back. Some of them have families and mortgages too. The exemption laws are the primary way the balance is struck.
There's no way to know from what you said if your tax refund could have been exempted (protected from creditors). You're allowed certain exemptions under California law. Assets that fit within those and are claimed in your filing are protected. Other assets are not protected. If you had to use the large California homestead exemption to protect equity in your home, you very well might not have had exemptions available for your tax refund. You should discuss this matter with your bankruptcy attorney.
This reply does not constitute legal advice or establish an attorney-client relationship.
Two techniques people use are:
1. Wait until after refund is received before filing chapter 7
2. Set exemption level so that the tax refund will be near zero.
You will have state exemptions that can exempt part of the refund possibly. Work with the Trustee on this.
Curt Harrington Patent & Tax Law Attorney Certified Tax Specialist by the California Board of Legal Specialization PATENTAX.COM This communication is general information and not legal advice, and does not create an attorney-client relationship. This communication should not be relied upon as any type of legal advice. Please note that no attorney-client relationship exists between the sender and the recipient of this message in the absence of either (1) a signed fee contract and (2) remission of an agreed-upon retainer. Absent such an agreement and retainer, I am not engaged by you as an attorney, nor is any other member of my law firm.
From the facts you laid out, it looks as though your attorney had to use California Civil Procedure (CCP) 704 to exempt (i.e. protect) the equity in your house under what is commonly referred to as the homestead exemption. Unfortunately, if you use the CCP 704 exemptions, then you cannot also use the CCP 703 set of exemptions. You are forced to use only one set of exemptions.
If you had no equity in your house, then you could have used the 703 exemptions, which would allow you to protect under what is commonly the referred to as the "wildcard" exemption. The "wildcard" exemptions allows you to protect anything up to $23,250.00 in value (i.e. cash, diamonds, stock, and tax refunds). Because you needed to use the homestead exemptions under CCP 704, you lost out on the right to use the wildcard exemption, and thus you can only protect under CCP 704 your house, 75% of your income if it in the bank, $1400 of jewelry, approximately $2550.00 of a car, and your qualified Retirement account.
The rationale for taking your refund is that you were able to keep your house and not sell anything else, therefore the creditors should get the refund since if you did have to sell the house they would have been paid from the proceeds of the sale. Remember, that a Chapter 7 is a "liquidation" (i.e. a process by where you sell all your stuff to pay creditors except those items claimed exempt and then your debts are erased).
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