How NYC Bankruptcy can affect my tax return?
The calendar is entering the last three months of the year when the leaves fall and the days get shorter and nights get longer and cooler. And as we know that daylight savings time ends soon, we also know that bankruptcy trustees are going to be looking to take some or all of your tax refunds if you file for bankruptcy. The question that arises of whether delaying the filing will help you keep your refund depends on several factors.
In New York, as in every state, there are things you get to keep even though you file for bankruptcy. The Bankruptcy Code allows each state to set up its own scheme of what you may keep. The things you get to keep are called exemptions. Certain things, like your personal clothing and household effects, are usually exempt. You usually get to keep a car if it is not too expensive, and you usually get to keep retirement benefits. Each state is allowed to make up its own list. There is also another list in the Bankruptcy Code itself, and these are called the federal exemptions.
Which exemption list to choose: federal or state?
What happens in each state is that your state can restrict you to the state exemptions, tell you that you must use the federal exemptions, or allow you to choose either list. In New York, you can use either the state list or the federal list, but cannot choose some from one list and some from the other. The New York list is much more generous as to the homestead exemption, going as high as $150,000 per person, while the federal list allows an exemption of only $22,975. At the same time, the federal exemptions allow one to keep $12,725 in cash, while under the New York exemptions one is allowed to keep only up to $5,000 in cash. The cash exemptions, though, are reduced, either partially or fully, if you use the homestead exemptions.
The result of all of this is that if your tax refunds are less than $12,725 in total, you can file at any time and keep them, assuming you do not use the homestead exemption. If you file at the end of October, for example, the trustee is entitled to take 10 months worth of your tax refund, or 10/12 of the refund. We start claiming exemptions for tax refunds for our clients beginning in the fall, and very few people are getting back more than $12,725, so they get to keep all of their refunds.
What if I’m already using homestead exemption?
If for any reason you cannot use an exemption for tax refunds, because you use the homestead exemption to the point where you cannot use the cash exemption, we then have our clients wait until the refunds arrive and they have time to use them for family purposes. Then they file.
All of this takes planning, which your attorney will help you with. Deciding which exemptions to use, and when to file, can usually help a client keep their entire refund.
Allan Bloomfield practices bankruptcy law in Forest Hills, Queens. Contact Allan today for a free consultation.