5 Common Bankruptcy Myths: Debunked

Without a doubt, there is no shortage of misinformation when it comes to bankruptcy. Veitengruber Law works hard to consistently provide valid, up-to-date information about bankruptcy in New Jersey to help our readers and clients educate themselves based on facts.

Today, however, we’re going to address some of the biggest bankruptcy myths and the truth that lies behind them. Much like the mythical mermaid, believing in something that isn’t based on facts won’t make it a reality any way you look at it.

  1. “You can’t discharge income taxes in bankruptcy.” For some reason, it is a common misconception that income taxes are non-dischargeable in a chapter 7 bankruptcy. The reality is that income taxes are the only type of tax debt that can be discharged! Read more about the rules associated with tax debt qualifications for bankruptcy here.
  2. “Because of the Means Test, I’ll have to file chapter 13, which won’t help me get rid of any debt, so why bother?” While the first half of this may be true, even if you don’t qualify for chapter 7 based on the Means Test, filing for chapter 13 does not automatically mean that you will have to repay all of your debts in full. In fact, most chapter 13 reorganization plans see the debtor only paying a fraction of their total debt amount.
  3. “I can’t risk ruining my spouse’s credit, so bankruptcy’s not an option.” This is something we hear constantly. In New Jersey, bankruptcy does not have to be filed jointly with your spouse. You may need to disclose how much money your spouse makes, but ultimately you can file solo and it will literally have no impact on your spouse’s credit score.
  4. “Bankruptcy is only for people who are unemployed and/or impoverished.” While we understand why this belief exists, we want to be clear that it doesn’t matter how much money you make when it comes to bankruptcy. As long as your debts and expenses outweigh your income, you will almost certainly pass the Means Test, which will qualify you to file for bankruptcy in NJ.
  5. “Any attorney can help me file for bankruptcy. The cheaper the better.” Did you know that some attorneys will take your retainer even if they have zero experience with bankruptcy law? Do your research and select a bankruptcy attorney in New Jersey who has hundreds of bankruptcy cases under his belt. Selecting a NJ lawyer with little to no bankruptcy experience may cost you less money up front, but the end result can be catastrophic.

At Veitengruber Law, we’ve made it our priority to help New Jersey debtors get out from under their debt. We provide our clients with personalized and in-depth meetings so we can evaluate your debts from every angle.

As our client, you’ll receive tailored advice and a team to walk you through the entire bankruptcy process from start to finish and beyond. Because we understand the financial strife our clients are facing, we offer free consultations and extremely flexible payment plans that fit into your reality.

“There are very few monsters who warrant the fear we have of them.” ~ Andre Gide

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Can I Keep My Tax Refund if I File for Chapter 13 Bankruptcy?

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Tax day is once again approaching, and, if you have filed for bankruptcy, you undoubtedly have some new questions this year about filing your taxes and whether or not you can receive federal tax refunds.

Here, we will focus on Chapter 13 bankruptcy and the effect it will have on your federal taxes and refund(s). Firstly, let’s go over the definition of this type of bankruptcy. In order to be able to file for a Chapter 13 bankruptcy, you must be either: gainfully employed, self-employed or a sole proprietor. The reason for this requirement is that a Chapter 13 is actually a reorganization of your debts rather than a forgiveness of your debts. In addition, all of your tax returns within the past four years must have been filed correctly and on time.

A Chapter 13 bankruptcy filing will allow you to keep possession of all of your assets/property. The purpose of a chapter 13 proceeding is to create a plan that will allow you to pay back all or most of your debts over the next 3 to 5 years. Other types of bankruptcies can result in you losing assets that you cannot pay for.

In order to file for a Chapter 13, your total debt burden must not be so high so that creating a reasonable repayment plan would be impossible. Your repayment plan will be based on your income, your reasonable living expenses, and the specific debts that you have incurred. As you will be required to pay a specific amount of money each month to a number of different creditors, you will be living on a very strict budget until these debts are sufficiently paid down or paid off completely, depending on what is specifically set out in your repayment agreement.

Around tax time, the appeal of receiving a substantial lump some of money in the form of a tax refund can be very tempting when you are living on such a strict budget every month as you repay your debts.

That being said, it is important to know that, for many people involved in a bankruptcy case, tax refunds are often delayed or are required to be used as payment toward your Chapter 13 debts. This is especially true if any or all of the reason you filed for bankruptcy is overdue federal tax debts.

When you file for a Chapter 13 bankruptcy, you will be required to put all of your disposable income toward repayment of your debts. Disposable income is defined as any income that is not used to pay for your reasonable monthly living expenses. Under this definition, your tax refund will be considered disposable income because you will not have listed any potential tax refund money when you filed for Chapter 13 bankruptcy.

However, it is possible for you to excuse your tax refund from being considered part of your disposable income on a year-by-year basis. This is only possible if you have encountered a necessary living expense that can legitimately be considered unexpected.

In order to be able to keep your tax refund during a Chapter 13 bankruptcy, a separate plan modification will need to be filed each year. In your Chapter 13 plan modification, you’ll need to specify exactly how much money you will be receiving as a tax refund.  You will also need to provide details that will prove your need to keep the money.

Anything that is considered part of your regular monthly living expenses will not be reason enough for the court to allow you to keep your tax refund during a Chapter 13 reorganization. The reason for this is that you agreed to certain expenditures when you originally filed your bankruptcy petition, and you will be held responsible for making ends meet with the income that you are currently generating.

To learn more about specific situations that may allow you to keep your tax refund if you have filed for a Chapter 13 bankruptcy, contact our office today. Feel free to use this contact form, and please use the information provided on our law blog to learn more about the ins and outs of bankruptcy.

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