In bankruptcy, as in life, timing is everything. Each bankruptcy case must be evaluated independently by an experienced bankruptcy attorney to determine the optimal time to file the case. That said, many people facing financial trouble can benefit by filing in December rather than January.
Many employers give annual employee bonuses at Christmas or at the end of the year. This money becomes a part of a Means Test calculation if you file your case in January and may cause your average income to exceed the median income amount. A higher average income will presumptively disqualify you from Chapter 7 and means that there is more money available to pay creditors in a Chapter 13 case. While there are legal arguments available to your attorney to overcome these presumptions, it is generally better to file after you receive your bonus check, but before the income is used as part of your Means Test calculation.
If you owe federal taxes and expect an income tax refund, you can avoid a federal tax offset if your case is filed by December 31. The Bankruptcy Code allows a creditor to reduce what is owed to the debtor by the amount the debtor owes to the creditor. In other words, if the IRS owes you a tax refund, and you owe the IRS a tax debt for a previous year, the IRS can keep your income tax refund and apply it to your tax debt, despite the bankruptcy automatic stay.
However, the Bankruptcy Code sets some rules, the most important being “mutuality of the debts.” Most courts find that mutuality requires that (1) the debts are held by the same parties; (2) in the same capacity; and (3) the off-setting debts are both either pre-petition or post-petition. See In re Meyer Med. Physicians Group, Ltd., 385 F.3d 1039, 1041 (7th Cir.2004). If all three conditions are not met, there is no mutuality and, therefore, the debts may not offset.
Your tax debt is a pre-petition obligation owed by you to the IRS. By filing in December rather than January, the income tax refund is a post-petition debt owed by the IRS to you (because a refund for tax year 2013 isn’t owed by the IRS until after December 31, 2013.) The Bankruptcy Code does not allow the IRS to take and apply your post-petition income tax refund to offset a pre-petition income tax debt because there is no mutuality of the debts! Simply exempt and keep your tax refund and discharge your old tax debt during your bankruptcy case (if you qualify, which is another topic for another day).
For more information and a free consultation call the experienced bankruptcy attorneys at Fears Nachawati Law Firm at 1.866.705.7584 or send an email to firstname.lastname@example.org.