Bankruptcy

Anticipating Bankruptcy: Plan Now To Avoid Forfeiting A Tax Refund To Your Bankruptcy Trustee

By Jonathan Alper

There are usually several things you can do to prepare for filing bankruptcy if you can anticipate the need to file months in advance. I consulted with a client living in Ft. Myers who he will need to file Chapter 7 bankruptcy by the end of this year.  He needs to wait until year end so that his repayment of family loans in 2009 will not be reversed as preferential payments chosen creditors. The told me he usually gets a significant tax refund and asked me if there is anything he can do to avoid losing the refund over to the bankruptcy trustee after his creditor meeting anticipated early in 2011.

I suggested that this client change his income tax withholding to zero for the balance of the year. My CPA tells me that taxpayers have the right to set their withholding amounts. If the client does not withhold taxes for the second half of the year he will probably wipe out any tax refund accrued during the first part of the year and end up owing taxes when he files in April, 2011. There will be no tax refund receivable if he files bankruptcy later in 2010. The client can spend the extra money not withheld by the IRS on necessary house or medical expenses, bankruptcy attorney fees, or on a dream vacation. This person is not obligated to give the IRS money now to  hold for the benefit of his creditors and a bankruptcy trustee after filing. Better that the client use the money for himself than forfeit a 2011 refund in his bankruptcy case.

Full post as published by Florida Bankruptcy Law on July 13, 2010 (boomark / email).