Thursday, April 12, 2018

Does the Utah Anti-Deficiency Law Protect Me?

When most families purchase a home, they don’t envision ending up facing a foreclosure sale, but in states like Utah where the housing market has been particularly hard hit, foreclosure is an all-too-common event. In cases where a home has plummeted in value, borrowers have two main concerns:

  1. I’m afraid to lose my home.
  2. I’m afraid my lender will sue me for deficiency judgment after the foreclosure sale and my personal property will be attached.

Does Utah law allow for a bank to sue a borrower after their property has been sold at foreclosure? When it comes to residential real estate, generally speaking, the answer is no, although the facts of each case will determine the outcome.

Below are some general principles to keep in mind when trying to determine whether you will be protected by Utah’s anti-deficiency statute.

Does the Utah Anti-Deficiency Law Protect Me

You Must be Underwater in Order for a Deficiency to Arise in the First Place

First and foremost, a lender cannot sue a borrower for a deficiency judgment where the foreclosure sale price is high enough to satisfy the outstanding mortgage balance.

By definition, a deficiency judgment arises when a home is underwater, the bank forecloses and the sale price is insufficient to pay back the mortgage balance. If your home sells at foreclosure for more than what you owe, there is no deficiency and can therefore be no deficiency judgment.

As a practical matter, the scenario where a foreclosure sale completely satisfies the mortgage debt simply won’t apply to most Utah homeowners who are underwater on their property thanks to the national housing downturn. Assuming your home is underwater and you’re facing foreclosure in Utah, we’ll move on to the next important set of facts, which deal with the type of mortgage you have and the size of your property.

Utah Anti-Deficiency Statute: The Basics

Utah’s anti-deficiency statute is codified in the Utah law prevents a lender from seeking a deficiency judgment after foreclosure when the mortgage loan was made to help purchase the home, the property is less than 2.5 acres in size and less than two “dwelling units” in size.

Review this below:

If a mortgage is given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price, of a parcel of real property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling, the lien of judgment in an action to foreclose such mortgage shall not extend to any other property of the judgment debtor, nor may general execution be issued against the judgment debtor to enforce such judgment, and if the proceeds of the mortgaged real property sold under special execution are insufficient to satisfy the judgment, the judgment may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary.

What does this legalese mean? Well, a mortgage is given to “secure the balance of the purchase price” of a home when you take out a mortgage to finance your property. If you’re like most of us and couldn’t afford to buy your home in cash, you relied on mortgage financing to buy your house. If you did, the Utah legislature believes that your lender shouldn’t be permitted to sue you for a deficiency and come after your personal assets after they’ve foreclosed on you. As long as your property is 2.5 acres or less in size and you used mortgage financing to purchase the property, you’re protected from a deficiency judgment.

Similarly, Utah Code prohibits the bank from seeking deficiency judgment where they have foreclosed by power of sale. We’ve included the language of the statute below:

If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee’s power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses.

This provision adds an additional layer to the Utah anti-deficiency laws. Foreclosure by power of sale is a quick, inexpensive way for lenders to take back property; however, because there is no judicial oversight, the process is more highly scrutinized by the court. In this regard, Utah law says that a bank can foreclose by power of sale, but if they do they will not be permitted to seek a deficiency judgment.

How do you know whether your home is subject to power-of-sale foreclosure? Although Utah allows both judicial foreclosure and power of sale foreclosure, power of sale is the most common. Look at your mortgage documents: If you have a Deed of Trust, your lender is entitled to foreclose by power of sale. It should be noted that the 2.5-acre requirement applies in the power of sale legislation just as it does in other areas.

HELOC Mortgages, Investment Property Not Protected

It is important to keep in mind that while Utah’s anti-deficiency laws are consumer-friendly, they are not uniform in application. There are limits to the protections from deficiency judgments not only to purchase money mortgages and properties that are smaller than 2.5 acres in size, but also requires that the number of dwelling units not exceed two (2). This limitation was put in place to protect homeowners from deficiency judgments while classifying real estate investors separately from homeowners.

For example, if you own a multifamily apartment building on property that is less than 2.5 acres in size and lose the building to foreclosure, you still will be subject to a deficiency lawsuit under Utah law. Similarly, if you tapped into home equity by taking out a second mortgage on your property, that lender can pursue you for deficiency judgment as well because the money was not borrowed to finance the purchase of your home.

Free Initial Consultation with a Utah Lawyer

It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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Wednesday, April 11, 2018

How Adultery and Infidelity Relates to Divorce in Utah

As a divorce lawyer, I’m regularly asked about how adultery affects divorce. In Utah, adultery (infidelity) is one of the statutory grounds for divorce.  Incompatibility, gross neglect of duty, extreme cruelty, and habitual drunkenness are also grounds for divorce in Utah.  None of these grounds are more legally significant than any of the others – they will all suffice to allow the court to find that there are grounds to terminate the marriage.

In Utah, as in most states, adultery is not legally relevant to custody matters.  In the eyes of the law, a person can be a bad spouse and that has nothing to do with whether they are a bad parent.

How Adultery and Infidelity Relates to Divorce in Utah

In Utah, adultery has no legal relevance to the division of property.  A court will not give one spouse more property than the other in order to punish the spouse who has been unfaithful.  In Utah the primary purpose of the divorce court is to divide things and end things.

In Utah, one spouse’s commission of adultery does not automatically mean that the other spouse will be awarded the marital home in the divorce.  If the one spouse asks the other to leave as a result of adultery, the faithful spouse will not be any more entitled to have the house than he or she would have been if adultery were not an issue.

In Utah, just because the marriage is ending after adultery, that does not mean a court will fail to consider shared parenting.

Once the marriage is over, the court will rarely enter an order requiring separation between the “object of affection” and the children.  Unless a court finds a parent unfit, that parent will have the right to make their own child care arrangements.

When one spouse is leaving a marriage because of adultery, the other spouse may unnecessarily prolong divorce litigation in order to maintain a connection.  While adultery is not legally relevant, it is not unusual for divorce litigation to confuse the feelings surrounding infidelity with the legal issues surrounding the end of the marriage.

If one of the parties alienates the children by disclosing the other parent’s infidelity, or worse, by stating the infidelity as the reason for the end of the marriage, a court may find that the disclosing parent is unable to put the needs of the children before their own need for vindication.  A pattern of such behavior, with no regard to the strain it causes on the children, could result in custody of the children being awarded to the party who committed adultery, rather than the party who chose to discuss the adultery with the children.

In Utah, the court does not care if you were a good spouse to the unfaithful party, and you did not cause the end of the marriage.  The court only cares that the marriage is ending and things have to be ended and divided.  You will not be awarded any more spousal support (alimony) than you would receive otherwise, and the court is not going to order the leaving party to “find a way” to let you maintain the exact same lifestyle that you lived before the end of the marriage.  The court is going to expect you to live as if the income available to the parties is now being divided among two households.

Be honest with your lawyer about infidelity – it is never a good thing for your lawyer to find out about any relevant information by surprise.

Free Consultation with Divorce Lawyer in Utah

If you have a question about divorce law or if you need to start or defend against a divorce case in Utah call Ascent Law at (801) 676-5506. We will help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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Tuesday, April 10, 2018

Lessons Learned from 50 Cent’s Bankruptcy

A federal judge recently discharged the bankruptcy case of rapper 50 Cent after he paid more than $22 million of his debt.

50 Cent filed for Chapter 11 reorganization in 2015, with debts of $36 million and assets of less than $20 million. The “Get Rich or Die Tryin’” artist, whose real name is Curtis Jackson, paid off a five-year plan early with $8.7 million of his own money and $13.65 million he received in a settlement of a legal malpractice lawsuit.

Lessons Learned from 50 Cent's Bankruptcy

Jackson’s bankruptcy case started when a woman won a $7 million settlement against him in 2015 for posting a sex tape. Soon after, he filed for bankruptcy to help with that debt, as well as his failed business ventures.

But late last year, Jackson nearly was in hot water when he posed with stacks of cash on Instagram. A judge questioned if he was really declaring all his assets, but Jackson said he was merely living up to his perceived image — a famous rapper with loads of money around him — and that the cash was a prop.

In his response to the judge, 50 Cent said: “Just because I am photographed in or next to a certain vehicle, wearing an article of clothing, holding a product, sitting next to what appears to be large sums of money or modeling expensive pieces of jewelry does not mean that I own everything in those photos.”

Here are four things everyday consumers can learn from 50 Cent’s high-profile bankruptcy case.

Chapter 11 Isn’t Just for Companies — People Can File, Too

Let’s face it — none of us are like 50 Cent. We’re not celebrities and we don’t have his life, grandioses or not. But what lessons can we take away from his very public proceedings?

For most of us, it’s to know your bankruptcy and the rules, inside out.

Chapter 11 of the Bankruptcy Code usually involves a corporation or partnership, reorganizing to keep the business alive and pay creditors over time. But people in businesses or individuals also can seek relief in chapter 11.

For individuals, chapter 11 has some similarities to Chapter 13 bankruptcy, which is a reorganization of a consumer’s finances to pay creditors over 3-5 years. With the help of a bankruptcy attorney, chapter 13 filers work out a payment plan that allocates their disposable income into monthly payments.

Nearly anyone can file for chapter 11, whereas many small businesses are ineligible for chapter 13. Chapter 13 also is only available to debtors with regular income and subject to debt limitations — which, as of April 2016, were no more than $394,725 in unsecured debt (debt not backed by collateral, such as credit card debt) and $1,184,200 in secured debt (like mortgages and car loans).

Your Bankruptcy Case Can Last a Few Years, or a Few Months

A typical timeframe for a bankruptcy discharge varies depending on which chapter you file. For 50 Cent, he filed for bankruptcy in 2015 and had five years to pay off his debt, but paid up earlier this year.

Under Chapter 7, the debtor generally doesn’t pay back his or her creditors. Most people prefer to file under chapter 7, with common debts eliminated like medical bills or personal loans. Chapter 7 also is quicker than other bankruptcy proceedings, and typically lasts 4-5 months.

Chapter 13 filers who earn income that’s less than the state average for their family size enter a 3-year payment plan. Those who exceed the state average are bumped up to five years. The payment plan allocates consumers’ disposable income to make monthly, consolidated payments to creditors.

Chapter 11 can be a little more complex and expensive than chapter 13, and fewer types of debt are dischargeable. Special provisions do streamline these cases for small business debtors, though. Furthermore, Chapter 11 also does not require debtors to turn over their disposable income to a trustee, but the total value of his or her disposable income over a five-year period.

You Need to Be Completely Honest with the Court

If you try to game the system, as it initially appeared 50 Cent had when he posed with stacks of fake cash, you could be in big trouble. Luckily, he was in the clear.

However, people enter bankruptcy court to receive a discharge, and the biggest way to screw that up is to be dishonest. Other than having your bankruptcy case dismissed, you could be fined big time or end up in jail.

Section 727 of the Bankruptcy Code lists the various grounds for objecting to a bankruptcy discharge, including:

—lying under oath;

—destroying records or failing to keep adequate records;

—no good explanation for a loss of assets; and

—concealing or transferring property within one year before filing in an attempt to defraud a creditor.

You must tell the court about everything you own, plain and simple. If a bankruptcy trustee expects you may have left out assets, they’ll schedule a 2004 exam and ask questions under oath.

It probably goes without saying, but social media can ruin your chances at a successful bankruptcy if a bankruptcy trustee looks through your accounts and finds something unsavory. That includes posing on Facebook with assets, like a car that you own but haven’t told the court about.

Finally, if it’s found you have concealed or intentionally transferred property before your bankruptcy case, you can be sued. You can also lose all non-exempt assets without any debt relief.

You Can Recover After Bankruptcy

Say you’ve made it safely through your bankruptcy proceedings. You breathe a sigh of relief. (If you’re 50 Cent, you posted on social media immediately afterward.)

What next?

Outside of the impact of bankruptcy felt during proceedings, bankruptcy and debt solutions can impact your credit score, but not as largely as you might think. So don’t put off filing for bankruptcy. The sooner you get help with your debt, the better your credit score will be in the long run — which will help you be more likely to get a future loan for a house, car, or rebuild credit with a credit card.

Make sure to review your credit reports, as all credit card accounts should have zero balances after a bankruptcy discharge. When opening a new credit card account, put small balances on it and pay them off immediately. Also, make sure to live within your means.

And beware: those annoying collectors may still call. However, collectors who ignore the discharge order are violating federal law, under section 524 of Title 11 of the United States Code. A discharge effectively operates as an injunction against continuing to collect or recover from the debt.

Free Consultation with Bankruptcy Lawyer

If you have a bankruptcy question, or need to file a bankruptcy case, call Ascent Law now at (801) 676-5506. Attorneys in our office have filed over a thousand cases. We can help you now. Come in or call in for your free initial consultation.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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Monday, April 9, 2018

Should Filing Bankruptcy Be The Last Resort?

Although we’ve mentioned it time and again on the forum, it bears repeating: filing for bankruptcy is not a decision to be entered into lightly. In fact, it is important to get good information and carefully weigh your options.

Should Filing Bankruptcy Be The Last Resort

Is Bankruptcy Always a Last Resort?

Having said that, delaying too long can cause unnecessary financial strain and serve to compound existing problems. Is bankruptcy always the last option? Some of the common things consumers do before they consider bankruptcy include: • Cash out their retirement funds to pay debt • Pay a debt settlement company to settle their debts • Settle their debt by dealing directly with the creditor or its attorney In some cases, these bankruptcy alternatives can be just what the doctor ordered, however in others they can put you in deeper trouble without meaningful debt relief.

Depleting Your Retirement To Pay Debt

Selling assets to avoid bankruptcy is often a bad idea and a retirement account is no exception. As Bankruptcy Lawyers in Utah like to point out to everyone who meets with us about bankruptcy…

The fact is that the lingering recession is causing a lot of people to file for bankruptcy who never thought they would. While the recession is is undoubtedly a sad turn of events, I am also seeing an even more disturbing trend. Namely, a lot of them are selling all of their property in an effort to stay current with their bills and avoid filing for bankruptcy. By the time they come to me, they have already gone through everything they own. While these efforts are always well-intentioned, they are catastrophic for their finances. In a lot of cases, people are selling assets that they would otherwise be able to keep if they would have thought about filing for bankruptcy a little sooner.

Perhaps nowhere is this point better illustrated than in the context of a retirement account. ERISA qualified 401(k) accounts and many IRAs are completely exempt in bankruptcy. This means you can file bankruptcy, shed your debts and keep your retirement. As Jacob describes, it is always difficult to see someone liquidate their retirement only to be forced into bankruptcy a few months later. For more information, see: Retirement Savings and Bankruptcy.

Debt Settlement vs. Bankruptcy

Debt settlement companies promise the world but rarely deliver. They often charge fees that far exceed the cost of bankruptcy and actually require their clients to go deep in default in order to settle their debts. Here is how the process works: you, the debtor, stop paying on your credit card accounts and other bills and instead save some of the money. When you’re deep enough in default, the creditor has written off the debt and may agree to accept a reduced payment in satisfaction of the balance. You fork over the money you’ve saved plus a hefty fee and you’re out of debt. That’s how it works sometimes, but definitely not all the time. While you’re waiting on the debt settlement company, you’re creditors are definitely not waiting on you. They’re reporting delinquencies on your credit. calling and sometimes actually suing to collect. By the time you’ve reached your debt settlement goals, your wages may already be in the process of being garnished or a judgment might have been entered against you. Sure, filing for bankruptcy can help with most of these problems, but why wait?

Negotiating With Creditors instead of Bankruptcy

While the debt settlement waiting game is expensive and often ineffective, sometimes negotiating directly with creditors can be a nice alternative to filing for bankruptcy if you already have the cash to make a deal. If you stand to have more assets liquidated in bankruptcy than you’d save in debt, dealing with the creditor through an attorney can often result in signifcant savings and a permanent solution to the problem. In these cases, bankruptcy may very well be your best option. For example, let’s say you owe $50,000 on a delinquent business loan but have $150,000 in cash and stocks. Filing for bankruptcy would result in the trustee liquidating your stock portfolio to pay your creditors, in fact, they’d likely get paid in full. In these instances, it makes much more sense to negotiate a reduced payment directly with the creditor.

Fresh Start For You

Although the costs are not insignificant, the purpose of bankruptcy is to provide those struggling with debt a fresh start. Sometimes, the bankruptcy card is only to be played as a last resort, however, in some cases it offers the most thorough relief on the best timeline. Each situation is different, if you’re contemplating bankruptcy, be sure to meet with an experienced attorney.

Free Consultation with a Bankruptcy Lawyer

If you have a bankruptcy question, or need to file a bankruptcy case, call Ascent Law now at (801) 676-5506. Attorneys in our office have filed over a thousand cases. We can help you now. Come in or call in for your free initial consultation.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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Sunday, April 8, 2018

Beneficiary of a Will

It is important to select and name the beneficiary of a Will with care. The beneficiaries will receive the assets or benefits that have been designated in the document. There may be a single beneficiary or even multiple beneficiaries. An estate planning lawyer can advise you on how to select them.

Beneficiary of a Will

You need to be careful about how you name a beneficiary of a Will. While identifying beneficiaries by name and relationship is what you want to do, problems can still arise. For example, suppose you name your children as beneficiaries. Should one of your children predecease you, you will need to specify what happens to that person’s share to avoid confusion. If you want that child’s share to go to his or her heirs, then you must make that intent clear in your beneficiary designation. This can be accomplished by clearly setting forth an alternate beneficiary designation or by including a per stirpes clause.

Another consideration when naming a Will beneficiary is the status of the person you want to benefit.  For instance, if your child is not over the age of 18, the child does not have the legal capacity to receive a bequest in his or her own right.  In these situations, a testator should consider having a child’s share placed into a trust the terms of which are set out in the Will.  This type of trust is a testamentary trust.  In a typical situation the Trust provisions may provide that the property is given to a named trustee to hold in trust for the child until the child reaches say age 21 at which time the child receives one-half of the fund.  The trust can then provide that the balance of the trust is to be paid to child when he reaches age 24.  Also, the trustee can be given broad powers to distribute the trust principal and income to the children throughout the term of the trust.

Joint Bank Account

The probate process is complex, and some people will take steps to avoid it. Additionally, probate proceedings are also a matter of public record. To avoid probate, one of the things some people do is name another person as joint owner of property such as a joint bank account or real estate. When there is a joint bank account at death, the surviving owner automatically becomes the sole owner of the entire bank account or other joint asset. A Utah probate lawyer can explain how this process unfolds.

Owning assets jointly with another can be a simple way to distribute an estate. However, problems can arise where the joint ownership was created only for the convenience of the asset owner during their lifetime and did not actually reflect their desires as to the distribution of their property upon death. In fact, the distribution of the entire asset to the surviving joint owner upon death may directly conflict with the decedent’s estate plan as set forth in a Will. Unfortunately, the automatic nature of the transfer of joint assets generally cannot be circumvented by the more general language of the decedent’s Will.

This situation is a very common cause of Estate Litigation in the Surrogate’s Court, with which an estate attorney is familiar.  A typical case may involve a child who lives with or near a parent. Although the parent has created a Last Will leaving all of his assets equally to all children, unknowingly, the parent puts the one child on the bank account as a joint owner so that the child can help the parent with his daily bills and finances. When the parent dies, the entire joint account automatically becomes the property of the one child and the provisions in the Will do not apply.

Utah attorneys, as well as those throughout the state, are aware that planning an estate requires understanding the nature and ownership of all of the assets involved.  At their own peril, many people do not pay close enough attention to the names they put on their assets and then probate litigation occurs where family members allege undue influence and improper conduct on the part of individuals who benefit from these oversights. An estate lawyer can review your situation to determine what is best for you.

Free Consultation with a Utah Estate Lawyer

If you are here, you probably have an estate issue you need help with, call Ascent Law for your free estate law consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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How to be a Safe Motorcycle Rider

Choosing to commute to work by motorcycle can save you time and money, but it doesn’t come without its risks. Making sure you’re well prepared can save you from injury in a motorcycle accident in Sandy, Utah or wherever it is you’re commuting. Unfortunately, sometimes accidents can’t be avoided.

How to be a Safe Motorcycle Rider

WEAR THE PROPER SAFETY GEAR ON EVERY RIDE

Even in the temperate weather of St. George, you’ll need to make sure you gear up every time your ride. Depending on your commute, you’ll need to plan your gear for the weather conditions. Make sure you have a good jacket that protects you in case of a motorcycle accident. If you’re a lawyer or a businessman that typically wears a suit to work, you might want to look into a jacket that doesn’t wrinkle your work clothes during the ride.

CONSIDER HEATED GEAR IN COLD CONDITIONS

If you’re commuting in a region that gets cold, make sure you have gear that keeps you sufficiently warm. In cold conditions you should consider using heated grips, heated gloves, a heated vest, a neck warmer and warm base layers. Investing in a helmet with an anti-fog lens will help you keep optimal visibility in cold weather conditions and help you avoid a motorcycle accident.

STAY VIGILANT: ACCIDENTS HAPPEN WHEN RIDERS GET COMPLACENT

Popular studies show that riders and drivers are most likely to crash within a 25-mile radius of their own houses. This is because people get comfortable close to home and stop paying attention to the road. This can also become a problem when commuting. Riding the same route every day can get comfortable, and commuters run the risk of getting complacent. No matter how many times you ride the same route through St. George, make sure you stay vigilant every single time — especially if you’re a mother, a father or a lawyer.

QUICK TIPS FOR MASTERING MOTORCYCLE CORNERING

You finally did it: You bought the Indian Scout that you’ve been dreaming about since you were 17. You’ve been slowly saving for the past year or so and gradually breaking the news to your friends and family: You bought a motorcycle, and you’re beyond ready to take it out on the road.

If you’re new to motorcycle riding, there are a few basic turning maneuvers that can help you avoid becoming the victim of a motorcycle accident as you streamline down the freeway from West Jordan, Utah to Southern Utah. Here are some of the best turning moves to know to avoid becoming the victim of an accident and consequentially having to call a lawyer.

The Outside-Inside-Outside Maneuver

When turning a corner in a motorcycle, the general rule of thumb dictates that you enter the turn on the outside, gradually move through the turn on the inside and then exit on the outside. There’s actually a science behind why this maneuver works so well: It allows you to see farther down the turn and anticipate a situation that might cause a motorcycle accident and the consequential need for a lawyer. It doesn’t matter if you’re making a quick turn while entering the freeway in West Jordan or traversing a roundabout on the East Coast.

This maneuver will help prevent a serious motorcycle accident.

Accelerate Through Turns

It’s critical to also briefly discuss speed. Contrary to what might seem like common sense, motorcyclists should actually accelerate through turns, not brake. Braking in the middle of a turn will force your motorcycle to stand upright or even slide out, and will almost certainly catapult you into the dirt on the side of the road. Although that curvy freeway entrance in West Jordan might look intimidating, don’t slow down — doing so might result in a motorcycle accident that almost certainly requires a lawyer.

Mastering a turn on a motorcycle takes practice, but it’s well worth it. Before you take that beautiful Indian Scout out on any major roads this summer, master these turning maneuvers to decrease your chance of an accident.

Free Initial Consultation with Lawyer

It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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Tax Refund and Bankruptcy

It comes up every tax season. You’re looking forward to receiving a big tax refund check, and you’re also working hard to get your bankruptcy case filed. So, what happens to your tax refund in a bankruptcy case?

Tax Refund and Bankruptcy

Here’s How to Keep Your Tax Refund

We’ve said it time and again on the forum: Tax refunds are the number one asset that trustees routinely take from debtors. Exemption laws in most states only go so far to protect cold, hard cash, and anything over and above your state’s designated exemption is fair game for the trustee.

Trustees love to go after tax refunds because, unlike real estate and other assets, there isn’t the overhead and effort associated with listing the property for sale. With cash, they can get a check.

Your Tax Refund is Part of the Bankruptcy Estate

On the day the bankruptcy is filed, any assets that you own become part of the “bankruptcy estate.” Your tax refund is one of those assets. A trustee is appointed to represent your creditors, collecting assets and liquidating those assets to pay your creditors. In many Chapter 7 cases, there simply are not enough assets or cash to make it worthwhile for the trustee to take those to pay the creditors.

Unfortunately, if you are owed a large tax refund, that may be an easy target for the trustee. With a little planning, we can help you keep most, if not all, of your tax refund.

Exception to the Rule: Earned Income Credit

There are some exceptions to the general rule that the trustee is entitled to any refund not received and spent prior to filing. In Colorado, for example, any refund attributed to Earned Income Credit and Additional Child Tax Credit is yours to keep. The rest is subject to turnover.

Want to Keep Your Tax Refund? Spend it.

The best way to avoid losing your tax refund is to file your tax return, receive the refund and spend it prior to filing your bankruptcy. Your bankruptcy attorney should instruct you to keep a record of how your refund is spent.

Your refund can be used for a variety of expenses, including most of your ordinary household expenses, like:

  • Rent
  • Mortgage payments
  • HOA dues
  • Food
  • Utilities
  • Clothing
  • Educational expenses
  • Medical and dental expenses
  • Insurance
  • Home maintenance and repairs
  • Car payment
  • Car repairs and maintenance

You want to have minimal — if any — tax refund money in your bank account on the day that you file your bankruptcy. You may also be eligible to save a portion of your refund using a retirement account. Ask your attorney for more information.

If you are able to follow these steps, you will not be required to turn over your tax refund.

Caution! If you spend your tax refund on luxury goods, use it to repay a friend or family member, or pay off a credit card or other unsecured debt, you may trigger an objection from the trustee, and be required to turn over your tax refund, even if you HAVE spent the money.

If you have NOT received your tax refund on the date of filing, the trustee will be entitled to the tax refund when you receive it.

When the Tax Refund Hits While You’re in Bankruptcy

Ideally, you’ll have very little tax refund left over by the time you’ve filed bankruptcy, and will avoid the plight of Mr. Ellman, below.

In Re Ellman involved a public school teacher in Baltimore, Maryland, who filed for chapter 7 bankruptcy and thereafter received a $15,827 tax refund. The case trustee filed a motion for turnover and the U.S. trustee appeared at the hearing in support of the trustee’s motion. The debtor argued that he relied on his tax refund for living expenses for the upcoming year and that his refund should be excluded from the bankruptcy estate as future wages.

Citing a long line of cases that include tax refunds as part of the bankruptcy estate, the court found the debtor’s argument unpersuasive and ordered that he turn over the funds minus approximately $10,000 he had available in unused exemptions. In total, Mr. Ellman was ordered to turn over $4,615 of his tax refund. To support its ruling, the court in In Re Ellman recited an uncontroversial rule of bankruptcy law that applies to tax refunds:

Income tax refunds are property of a debtor’s bankruptcy estate to the extent they are derived from withholdings from the pre-petition earnings of the debtor.

To put the court’s words in plain English, tax refunds received for wages earned prior to filing bankruptcy are considered property of the bankruptcy estate and are subject to liquidation if no exemptions are available.

Part of the job of any good bankruptcy attorney is to sit down with clients, discuss their assets and come up with a plan for maximizing the exemption laws to their client’s benefit. If you’re considering filing for bankruptcy and are unsure of how a large tax refund will be treated, consult with an experienced bankruptcy lawyer before making any further decisions.

How can you avoid this problem altogether? Don’t receive a tax refund

If you had a large tax refund last year, the first thing we will ask you to do is to look at your W-4 and adjust your exemptions. You only want to have the necessary taxes withheld from your paycheck, nothing more.

When you are filing for bankruptcy you DO NOT want to receive a tax refund. At a minimum, keep the tax refund small.

Instead of receiving a tax refund and giving it to the trustee, wouldn’t you like to have a little more money coming to you in each paycheck throughout the year? I thought so! You can use the IRS’ withholding calculator to determine how many deductions you should be claiming.

Other Bankruptcy Tax Refund Issues

If we file your case later in a year (between August and December), it is likely that the trustee will ask for a copy of that year’s tax return. I know this sounds strange since it’s September and you have not filed a tax return for the current year. The trustee may request a copy of the tax return for the current year as soon as you file it. He will then review the tax return to see if you are going to be receiving any refunds. If you are, he will ask for a pro-rata portion of the refund.

Since your initial appointment with the attorney may be several months before you actually file your case, we want you to plan for your bankruptcy by adjusting your payroll deductions to avoid having the trustee take your refund.

Free Consultation with a Utah Bankruptcy Lawyer

If you have a bankruptcy question, or need to file a bankruptcy case, call Ascent Law now at (801) 676-5506. Attorneys in our office have filed over a thousand cases. We can help you now. Come in or call in for your free initial consultation.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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