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The Benefits of Both “Asset” and “No Asset” Chapter 7 After Closing Down a Business

Posted by on July 14, 2019 under Bankruptcy Blog | Comments are off for this article

Besides wiping out (“discharge” is the legal term) your personal debts like credit cards and medical expenses, a Chapter 7 case can discharge all or most of your personal liability from a closed sole proprietorship, corporation, LLC, or partnership.  You are liable for the debts of a sole proprietorship and a partnership.  You can be liable for LLC or corporate debt to the extent that you signed a guarantee or in other circumstances.

 “Asset” and “No Asset” Chapter 7

Chapter 7 is sometimes called the liquidation form of bankruptcy.  That usually does NOT mean that if you file a Chapter 7 case,  all of your assets will be liquidated or sold.   One of the main purposes of the Bankruptcy Code is to give an honest debt a fresh start.  You get a fresh start by the discharge of most of your debts and keeping property that is exempt.

As a debtor in New Jersey, you can choose the exemptions listed in the Bankruptcy Code (called the federal exemptions) or you can use the exemptions provided under New Jersey statutes.  Since the federal exemptions are much more favorable to the debtor than the New Jersey exemptions, almost all NJ debtors utilize the federal exemptions.  If everything you own is exempt, you would have a “no asset” case, so-called because the Chapter 7 trustee has no assets to collect or distribute to your creditors .

In contrast, if you own something that is not exempt, and the trustee decides that it is worth liquidating and using the proceeds to pay a portion of your debts, then your case is an “asset case.”

The Quick “No Asset” and the Drawn Out “Asset” Case

Generally, a “no asset case” is simpler and quicker than an “asset case” because it avoids the asset liquidation and distribution to creditors process.

A simple “no asset” case can be completed in about three to four months after it is filed (assuming no other complications arise).  An asset case can take a year or more.

The Potential Benefits of an “Asset” Case

If you have an asset case, that can be turned to your advantages.  Two situations come to mind.

First, you may decide to close down your business and file a bankruptcy immediately in order to hand over to the trustee the headaches of collecting and liquidating the assets and paying your business creditors .  If you’ve been fighting for a long time to try to save your business, you avoid the added headache and expense of negotiating work-out terms with all the creditors.

Second, in the Chapter 7 process, certain debts, called priority debts, are paid first.  General debts get paid afterwards to the extent there are available funds.  More importantly, certain priority debts are not discharged by the bankruptcy.  That means you still owe them after the bankruptcy is completed.  Examples of priority debts that are not dischargeable include child and spousal support arrearages, and certain tax claims.

So, as a debtor, you want to pay off as much non-dischargeable debts as you can.  To the extent you have non-exempt assets, the Trustee can use the proceeds of the sale of those assets to pay off some or all of your priority, non-dischargeable debts. Non priority debts (except for most student loans) are discharged regardless of whether they receive payment in the Chapter 7.

Income Tax Refunds in Bankruptcy-Chapter 7

Posted by on June 23, 2015 under Bankruptcy Blog | Comments are off for this article

If you’re filing a “straight bankruptcy” case, how do you keep your income tax refund?

 

Keeping tax refunds is all about timing. You can generally keep your refund but absolutely have to play it right, following rules that at first may not make sense. It is all too easy to mess this up, so you truly should have your attorney guide you through it, applying your unique circumstances to your local laws and practices. But here are the general principles at play.

Let’s start with some background to make sense of this:

  • From the bankruptcy system’s perspective, a Chapter 7 case focuses on assets—determining whether you get to keep everything you own or not. That’s why it’s called the “liquidation” chapter. Most of the time you do get to keep everything, but sometimes some of it gets “liquated”—taken from you and turned by your bankruptcy trustee into cash, which then gets paid to your creditors.
  • So where does your tax refund fit into this—is it is an asset that your trustee can take from you? That mostly depends on your timing.
  • Everything you own or have a right to at the moment your Chapter 7 bankruptcy case is filed becomes your “bankruptcy estate.”
  • That “estate” includes both your tangible assets and also intangible ones. One kind of intangible asset is a debt owed to you. A tax refund can be such an intangible asset of your “bankruptcy estate.”

The timing of the filing of your Chapter 7 case determines whether a tax refund is part of your “bankruptcy estate” and therefore could potentially be taken from you:

  • An income tax refund is considered your asset as of the time of the last payroll withholding of the year being considered (so for this calendar (2015), the last withholding would be from your last paycheck in December and your employer would forward that money to the taxing authority in the beginning of January, 2016). That’s because as of that time, the full amount of that refund has accrued. Even though until you prepare your tax returns nobody knows the amount of your refund—or even whether you will be receiving one at all—for bankruptcy purposes, the anticipated tax refund is legally all yours as of the very beginning of the next year. And what’s yours is part of your “bankruptcy estate.”
  • So IF you file after the beginning of the year but before receiving and appropriately spending the refund, that refund is part of your “bankruptcy estate” and is at least at risk of being taken from you. Again, this is true even if you have no idea how much that refund will be, or even whether you are entitled to one.
  • BUT, if you DO receive and appropriately spend the refund before your Chapter 7 case is filed, then the refund is gone and is no longer your asset, and so is no longer part of your “bankruptcy estate.” Your trustee has no claim to it.

Even if your tax refund IS part of your “bankruptcy estate,” it will not be taken from you if it is exempt:

  • Although theoretically it’s safest to file your Chapter 7 case when your tax refund is not part of your “estate”—such as after you receive and appropriately spend it beforehand, sometimes you don’t have that much flexibility about when you file your bankruptcy. Then especially it’s critical to get good legal advice about whether that refund will be exempt based on the local law applicable to the case.
  • Usually, you get to keep most or all of your “estate” because it’s “exempt”—protected. In the same way, tax refunds are often exempt, depending on the amount of the refund and the exemption that’s applicable to it.
  • Some states have specific exemptions applicable to certain parts of the tax refund, or laws that exclude them from the bankruptcy estate altogether, particularly for the Child Tax Credit or the Earned Income Tax Credit.

Even if a tax refund, or some portion of it, is not exempt, sometimes the Chapter 7 trustee may still NOT want it:

  • The trustee may decide that the amount the “estate” would get—the refund by itself or in conjunction with any other non-exempt asset(s)—is not enough in value to justify creating an “asset case.” The amount of refund to be collected may be too small to justify the administrative cost involved to collect and distribute it. You might hear the trustee say that the amount of the refund is “insufficient for a meaningful distribution to the creditors.”
  • What that “insufficient” amount is differs from one court to another, and often even from one trustee to another, so this is another specific area where you need the guidance of an experienced attorney.
  •  Caution: if the trustee is already collecting any other assets as part of the “estate,” then most likely he or she will want every dollar of your tax refunds that are not exempt.