Your Bankruptcy Trustee Can Pay Your Taxes For You

Occasionally, I run into a situation where a client needs to file for bankruptcy, maybe even needs to file NOW; but – they have non-exempt assets. Now, in Oklahoma we have pretty generous exemptions, and most people who file for Bankruptcy lose nothing but a bunch of debt. Occasionally, though, I run into someone with mineral interests, a significant amount of jewelry (our wearing apparel exemption is generous, but a $35,000 ring that isn’t your wedding or engagement ring is going to be a problem); and they still need to file. This is a problem.

Usually, given a little time we can find a solution that the client is happy with. This is what is called pre-bankruptcy planning, and it is tricky. There are plenty of things that you can do with an asset right before a bankruptcy filing that your Trustee can just undo. There are other things you can do that will get you into real trouble – losing your discharge, going to jail. This is not an area to mess around with if you don’t know what you are doing. Still, generally, given time, there are things that can be done to protect a non-exempt asset.

So, what happens when you don’t have time? Sometimes you need to file NOW. In those cases you file the case knowing that the Trustee is going to administer whatever the asset is. Several years ago, I filed a Chapter 7, and first thing the next morning was emailing the freshly appointed Trustee (who didn’t even know she was the trustee yet) wanting to know when would be convenient for my client to deliver approximately $50,000 in jewelry to her office. She was a little taken aback. In this particular case the client didn’t want the jewelry and had made some efforts to sell it but had not been successful.

Consequently, he was thrilled when I asked him if he would like to have the Trustee pay his taxes with the proceeds from the jewelry he didn’t want and hadn’t been able to sell.

Here is the scoop. We filed for what is called a short tax year. It is perfectly legitimate, although it is very rarely done. Basically, my client filed two tax returns for the year in which he filed for Bankruptcy. He filed one return for the calendar year up to the day he filed for bankruptcy, and he filed a second return for the remainder of the calendar year. We did this, because he had made no estimated quarterly payments prior to filing for bankruptcy; and his income for that period had been substantial.

By doing this we converted his tax liability for that first, short-year, return into a liability of his Bankruptcy estate that was entitled to priority – meaning it got paid first. He still had to pay the tax liability for the rest of the year, but that was only about a quarter of the year’s total tax liability. So, he got his Bankruptcy Trustee to liquidate stuff he didn’t want and use the proceeds to pay three quarters of his taxes for the year. Now, that is pretty sweet.

Elaine

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Categories: Bankruptcy, Taxes | Tags: , , , , , , , | Leave a comment

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