Don Pope & Associates

Bankruptcy and Income Tax Refunds

May a person filing bankruptcy keep their income tax refund?

10 Myths about Bankruptcy

Bankruptcy is a drastic step for many people and the concept of what it can do and the impact of filing lead many people to not consider it as a possibility. Many common misconceptions have developed surrounding bankruptcy. I attempt to address a few of the most common.

1. Everyone will know I've filed for bankruptcy.

Unless you're a prominent person or a major corporation and the filing is picked up by the media, the chances are very good that the only people who will know about a filing are your creditors. Records of filing a bankruptcy are public record, however, few publications report on who has filed.

2. All debts are wiped out in Chapter 7 bankruptcy.

Certain types of debts cannot be discharged in bankruptcy. The most common of which include child support, alimony, government issued or government guaranteed student loans, taxes and debts incurred as the result of fraud.

3. I'll lose everything I have.

While the bankruptcy laws vary from state to state, every state has exemptions that protect certain kinds of assets, such as your house, (up to a certain value), your car (up to a certain value), money in qualified retirement plans, household goods and clothing.

Most people will go through a bankruptcy without having to surrender any of their personal property.

4. I'll never get credit again.

In actuality you will likely get credit card offers again shortly after your bankruptcy.The catch is that they will be from subprime lenders that will charge very high interest rates. However, if you're planning to buy a house or a car, you might want to do that before you file. After bankruptcy, those loans will be tough to get and the higher interest rate on such a large purchase would have a significant effect on your payments. Also, if you have a credit card with a zero balance on the day you file for bankruptcy, you don't have to list it as a creditor since you don't owe any money on it. That means you might be able to keep that card even after the bankruptcy.

5. If you're married, both spouses have to file for bankruptcy.

Not necessarily. It is not uncommon for one spouse to file and another not. If the debt is in the filing spouses name only it can be discharged completely, however, if spouses have debts they want to discharge that they're both liable for, they should file together. Otherwise, the creditor will simply demand payment for the entire amount from the spouse who didn't file.

6. It's really hard to file for bankruptcy.

Under the Bankruptcy reform act that went into effect in 2005, filing for bankruptcy is more complex, however, it is not that difficult if the filing requirements are properly listed. A person is not required to use an attorney, however, we do not recommend going through the procedure without one.

7. Only deadbeats file for bankruptcy.

Many people file for bankruptcy after a life changing experience, such as a divorce, the loss of a job or a serious illness. They've struggled to pay their bills for months and just keep falling further behind. Bankruptcy offers them a fresh start after the devastation of such events.

8. I don't want to file bankruptcy on all my creditors, because I want to keep them as a creditor.

The bankruptcy laws require that you list all creditors regardless of your desire to maintain an ongoing relationship. You may choose to contact that creditor and seek to reaffirm a certain debt (agree to pay it despite discharge in bankruptcy) but this is usually up to the creditor. Some choose to allow you to reaffirm but many will not and simply close your account.

9. You can only file for bankruptcy once.

You can file for bankruptcy more than once, but the bankruptcy law that went into effect in October 2005 lengthened the required wait between filings. You can only file for Chapter 7 bankruptcy once every eight years. You have to wait two years to repeat a Chapter 13 filing and four years between a Chapter 7 and a Chapter 13 case.

10. I can max out all my credit cards, file for bankruptcy and never pay for the things I bought.

That's called fraud. The trustee in your case will review all your purchases right before your filing and if it is determined that fraud has occurred then your bankruptcy will be dismissed. The same rationale applies if you have fraudulently transferred assets seeking to hide them from your creditors. The trustee knows what to look for.