The Bankruptcy “Busy Season”

Posted By : admin
Category : Bankruptcy
22 - Jan - 2016

Most of the time when people think about a “busy season” they are thinking about accountants preparing and filing taxes.  However, bankruptcy attorneys often find that they have a “busy season” for bankruptcy filings that shadows tax season.  There are a few reasons for this that I will explore in this blog posting.

First, one of the most common reasons that people wait to file bankruptcy until tax season rolls around is purely financial.  What I mean is that often potential bankruptcy clients use their income tax refund to pay the attorney fee and filing fee for their bankruptcy filing.  This is completely understandable since people who need to file for Chapter 7 or Chapter 13 bankruptcy protection typically have limited funds on hand.

A second, and likely less obvious reason that tax season is also “bankruptcy season” in the Indianapolis division of the Southern District of Indiana is tied into bankruptcy exemptions.  A bankruptcy exemption is an amount of property that a person is allowed to have when they file bankruptcy that is safe from creditors and also the bankruptcy trustee.  Some states use federal bankruptcy exemptions and some states have opted out and have their own state bankruptcy exemptions.  In Indiana, the amount of cash that can be exempted on the date of bankruptcy is currently $350.00 for an individual filer or $700.00 for joint filers.  So, why does the cash exemption in Indiana result in an increase in bankruptcy filings during tax season?

The reason bankruptcy filings are high is that due to the low amount of cash that can be exempted by bankruptcy debtors.  If a potential debtor is going to file bankruptcy, but believes that they will be entitled to a $2,000.00 income tax refund it is probably going to be best for that person to wait before they file bankruptcy.  If that person filed a bankruptcy prior to receiving their refund, the trustee is going to want all of the refund less any amount attributable to the earned income credit and the $350.00 or $700.00 exemption.  Further, if a person waits too long to file bankruptcy then they may be giving up a part of their income tax refund for the following year.  The reason is that the trustee is going to be entitled to a pro-rated portion of your income tax refund the the year in which you file.  So, if you file a Chapter 7 bankruptcy on November 1, 2016, the trustee would be successful in forcing you to turn over 10/12th of your income tax refund that you would receive after filing your 2016 income taxes in 2017.

Confused?  I hope not.  But, the bottom line is that if you are thinking about filing bankruptcy you should probably meet with a bankruptcy attorney in your area.  By the time you file a bankruptcy petition it is too late to effectively plan to maximize any income tax refund to which you are entitled.  If you live in the Indianapolis area, including Zionsville, Carmel, Noblesville, Fishers or Westfield and would like to meet regarding bankruptcy contact our office at (317) 575-8222.  Don’t delay….after all, it is the busy season.