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PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4093
Experience:  35 years tax experience, including four years at a Big 4 firm.
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My wife filed a chapter7 bankruptcy, it was discharged by the

Customer Question

My wife filed a chapter7 bankruptcy, it was discharged by the courts before we were married. Months after the discharge we got married. She then received a letter from the trustee to surrender our tax refund. We filed a joint return. I offered to send him exactly 50% of the Fed And Sate return. He wanted all of our refund. I refused. Now the trustee is reopening her chapter7 bankruptcy, what can we expect from this?
Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.
Welcome to the site. I'mCustomer and will be helping you today. While I'm not a bankruptcy attorney, I can assist.
Trustees have been charged with obtaining all they can from a bankruptcy estate. In a car like yours, v they often make a claim for what I call the trailing refund, explicitly if your wife did not have any remaining cash exemptions.
The trustee action is a threat, that he hopes will get you to release some money. Your offer of half was not enough.
He can reopen the bankruptcy, since the refund was joint and for the year the estate was closed (the bankruptcy estate includes that refund).
I would consider the cost of not giving up the refund and having to go back to court, including legal, loss of work, and the aggravation.
I would consider amending your joint tax filing to see if you could segregate your wife's income and the bankruptcy estate. It is possible to split her tax year into the bankruptcy estate and the remainder of the short year. This might segregate your joint tax year and isolate it from trustee pursuit.
This technique is perfectly legit, and different bankruptcy districts will test the post- estate return differently. You should consult a tax pro in your area to see if this technique will work in your area.
Thanks for asking at just answer. Positive feedback is appreciated. I'mCustomer
Customer: replied 1 year ago.
Why would she have to go back to court?
Expert:  PDtax replied 1 year ago.
The trustee has the authority to petition the court to reopen her case. This is a threat, but he has the authority. If the court agrees (they will), appearances could be required.
There is a trustee in my district who is notorious for this kind of negotiation. He holds files up to extract money from filers, and all of us who do bankruptcy practice know to expect it from him.
The refund is in play. I would consider amending to married filing separate if the split year technique does not work. While it might reduce your refund, preparing returns this way might give you a lower amount to offer the trustee.
Let's say your joint refund is $5,000. Your married separate refund is $2,800. He didn't take your prior offer of $2,500. If you amend, he gets nothing, and it costs you $2,200. Offer him a draft of the amended return and $1,500 and watch him jump at it.
Customer
Customer: replied 1 year ago.
What if she offer nothing. Then what? Will he be able to come after her the following year for the refund?
Expert:  PDtax replied 1 year ago.
His legal rights could include reopening the bankruptcy action and estate. Courts do not want to do this. Makes everyone look bad, including both lawyers, the judge and the debtor.
If he reopens the case, it will not be closed until you pay. If her case is open in 2015 at all, that refund will be a bankruptcy asset. If it goes into 2016, that one will be, too.
Customer
Customer: replied 1 year ago.
Okay. So he will not close the case until she pay what he ask for?
Expert:  PDtax replied 1 year ago.
I'm trying to offer my take on this negotiation. Please keep that in mind. He has the right to reopen her car, but does not want to.
The bankruptcy estate includes the refund she receives in the year the bankruptcy is closed.
He does not need to reopen the case to make this request.
My suggestion, that you make an alternative calculation of the tax refund she might have coming, will allow you to make a counter offer. That is likely what he will accept.
I offered two methods to create a lower offer than the full refund.
I have had to do exactly what you are facing. The court issued a discharge, and the trustee held out for money to buy out his claim that income from a trust was an asset. He paid, in full.
The trustee could wait him out, and I did not have any tax return filling options to support a buyout. He would not discount his demand at all when I contacted him.
He holds cards, but you might be able to draw to a better hand by revising your tax returns as filed.
Customer