The Bankruptcy Estate and the New Year

By Richard Kistnen, Esq.

As the end of 2012 approaches, many people hoping to obtain a fresh start in the New Year are looking to file for bankruptcy in the coming days and weeks.  While in the normal course of filing for bankruptcy there are many pitfalls that have to be cautiously navigated, those filing have to be exceptionally careful now.  This article examines three items – the tax refund, holiday credit cards, and cash gifts – that may cause difficulties in obtaining a discharge in bankruptcy.
TAX REFUNDS – Tax refunds from filed returns are always problematic when it comes to bankruptcy.  For the layperson, the tax refund is an asset that does not come into existence until after the tax returns are filed and the money is received.  In the context of the bankruptcy estate, the tax refund asset comes into being starting January 1.  That is, since tax refunds are generally overpayments of federal and state taxes, the refund money is money that you COULD have in hand at the time of filing a case.  Moreover, exemptions (property that the law allows you to keep) limit the amount of money you can have when filing.  If you generally expect a large and significant tax refund, be sure to consult with a bankruptcy attorney early in the process to see how best to maximize protection of that expected refund.
HOLIDAY CREDIT CARDS – Credit Card use during and around the holidays tend to cause significant grief.  Generally, extensions of credit (such as credit card use) within three to six months of filing for bankruptcy will raise red flags with both trustees and credit card servicers.  Additionally, a creditor can object to a bankruptcy if an extension of credit was issued when the debtor was insolvent.  That is, if a creditor can show you were using a credit card even a year before filing bankruptcy during a time when you were insolvent, they may object.  When these red flags are raised, the creditor may make a motion to have that debt declared non-dischargeable.  If a debt is declared non-dischargeable, it survives bankruptcy, and the creditor may continue to pursue you for that particular debt.
CASH GIFTS – Many people give cash gifts to family and friends for the holidays.  These gifts, unfortunately, come from the bankruptcy estate.  Unless you can demonstrate that the monies come from an exempt asset, a trustee could bring an action to recover those monies.  Due to the time and cost involved in these recovery actions, some trustees will not bring such an action unless the amount transferred is significant enough to make it worth their while.  Notwithstanding, they could go after that money.  The last thing you would want for the gift recipient is for them to receive, during the holiday season, a complaint for turnover of monies you gave them.  Take the safe approach and speak with a bankruptcy attorney early in the process and disclose all transfers of money and property within at least the last year.
These are some things that you, as a consumer debtor, should think about if contemplating filing for bankruptcy as the New Year approaches.  It is important to be prepared and map out a plan to maximize the benefits of a fresh start after bankruptcy.  If you have questions about this article, feel free to reach the Law Office of Richard Kistnen.