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FAQ'S

Wednesday, September 17th, 2008

by Theodore Sliwinski, Esq.

Property Lost in Bankruptcy

1. What tax refunds will I be able to keep?

The Internal Revenue Service and the New Jersey Department of Taxation will keep refunds for taxes withheld from income prior to filing (usually the first return filed after the bankruptcy is filed) to pay taxes you owe, even if the tax will be discharged.

The chapter 7 Trustee can seize any refund which you are owed on the day that your case is filed. There are two situations wherein the Trustee may seize your refund:

a. If you have not received your refund from a previous tax year when your case is filed, the chapter 7 Trustee may take the entire refund.

b. The Trustee may take part of tax refunds for the year in which the chapter 7 is filed. The amount which he can take will be pro‑rated based on the number of months which have passed on the date that the chapter 7 is filed.

In New Jersey, the chapter 13 trustee does not ordinarily take any tax refunds, but your plan payments may be affected by the amount that a trustee could take had you filed chapter 7.

2. If a debtor has a lawsuit pending (i.e, automobile accident claim), does the debtor have to declare it in his bankruptcy? Do the proceeds from a personal injury case become the property of the bankruptcy estate, and then get distributed to the creditors?

A debtor is required to list all property or assets in which he or she has an interest at the time that the bankruptcy is filed.  An automobile accident claim which is the basis for a pending lawsuit is an asset and should be listed. The proceeds from that lawsuit can be taken by the Trustee for the benefit of the creditors unless they are exempt. The debtor case use his exemptions to keep about $20,000 of the proceeds from any personal injury settlement. Any proceeds from a workers compensation case are exempt, and they can’t be taken by the bankruptcy court.

If the court should determine that the failure to disclose such an asset is material and willful, then the debtor could be denied a discharge in bankruptcy. See, 11 U.S.C. 727(a)(2). The denial of the discharge does not change the ability of the credit to take and liquidate assets which the debtor failed to disclose. In addition, by omitting this information from the schedules, then the debtor could be committing perjury and bankruptcy fraud. Moreover, if you fail to list on your bankruptcy that you have a pending personal injury case, then I have seen insurance carriers try to deny your case on the grounds of fraud. Therefore, if you have a decent accident case, be sure to list it on your bankruptcy petition. You will be entitled to retain a decent portion of any of your settlement proceeds. If you try to hide your accident case from the bankruptcy court, then you most likely will get busted, and your case in the New Jersey Superior Court may be dismissed on the grounds of fraud.