Those facing personal bankruptcy might be looking for any way possible to pay off their creditors. During tax season, the prospect of a tax refund represents the opportunity to alleviate yourself of debt with one lump sum. However, if you are expecting a tax refund, you want to ensure that your money is spent in a way that helps your situation and doesn’t jeopardize your filing. If you are expecting a tax refund, a bonus, or any other type of cash influx, read on.
1. Don’t Pay Off Your Car Loan: The Florida motor vehicle bankruptcy exemption permits an individual to protect $1,000 in car equity. ($2,000 if married and filing joint bankruptcy) This exemption plays a significant role in determining whether your bankruptcy trustee will retain your vehicle and sell it to pay unsecured creditors.
If your tax refund is applied to your car loan, it will increase your equity and may put it beyond the exemption limits. Instead of keeping your car, the vehicle may be seized to satisfy your creditors.
2. Don’t Erase (Or Even Pay Down) Any Unsecured Debt: If you have decided that bankruptcy is the right option for you, filing will allow you to discharge much of your debt. It doesn’t make sense to use your bonus or tax refund to pay off a debt that will be dismissed during the bankruptcy process.
Talk to your bankruptcy attorney about the best way to utilize your refund based on your situation. Many people may choose to place this money in the bank to give them a headstart after the bankruptcy process is completed. If they want to use the windfall to help get rid of non-dischargeable debt (such as student loans), that is likely the best move.
3: Don’t Pay Back a Family Member: When you are filing for personal bankruptcy, you need to consider any financial interactions that have taken place with family members in the past 12 months. According to 11 USC 101, section 32 of the bankruptcy code, a relative of the debtor is considered an insider.
Suppose you give money to an insider for any reason, such as paying back a personal loan, within 12 months of the filing. In that case, the bankruptcy trustee has the right to demand that the recipient turn the cash over to the court to pay your creditors. Not only will this cause embarrassment, but it could also cause hardship for your family member – and result in a lot of hard feelings.
What To Do? Protect Yourself With a Bankruptcy Attorney
If you have a lump sum of cash coming in and it’s not enough to solve your debt problems – bankruptcy may still be your best option. Set up an initial consultation with a bankruptcy attorney to discuss the details of your situation and the options available to you. You don’t want to make a mistake that could cost you dearly if you decide to file bankruptcy in the future.
Richard V. Ellis is a Sarasota bankruptcy attorney who has helped hundreds of people get out from under their debt and start a new life.