Tax Season: Bankruptcy and Income Tax Refunds
Tax season is upon us, and many people think about a fresh financial start this time of year
When it comes to filing yearly taxes, it is an opportunity to assess current goals and whether current financial strategies are working efficiently. If you have filed a Chapter 13 case and are having trouble making your current plan payments, you may want to consider a conversion from a Chapter 13 Bankruptcy to a Chapter 7 Bankruptcy.
The main benefit of converting from a Chapter 13 Bankruptcy to a Chapter 7 Bankruptcy is that you will no longer have a monthly trustee payment
You can use your income tax refund to bring any outstanding secured obligations current with the lender (e.g. vehicle, mortgage). You will only have one case filed with the same case number, even if you convert from a Chapter 13 to a Chapter 7. Only one bankruptcy filing will show on your credit, rather than having a dismissed Chapter 13 case and a later filed Chapter 7.
Another major benefit of converting your case from Chapter 13 to Chapter 7 is that you can add any debts incurred after you filed your Chapter 13 case. If you incurred new debt during your Chapter 13 that is making it difficult to make your Chapter 13 payments, then a conversion can help alleviate this problem. Some examples of new debt can include new medical bills, or an unexpected, costly home repair.
In order to convert your case from Chapter 13 to Chapter 7, a notice will need to be filed with the Court
There are certain conditions that need to be met. Your bankruptcy attorney will discuss these with you.
With a Chapter 7, there is no monthly payment plan like there is with a Chapter 13. You will still have the automatic stay in effect during the length of your case. However, the Trustee may sell any non-exempt assets that you have in order to pay your creditors. This is known as liquidation.
Once a Chapter 7 case is finished, you receive a discharge of all debts that were part of your case. This occurs in a much shorter time period than for a Chapter 13 case, since there is no repayment plan. In many instances, converting your case from a Chapter 13 to Chapter 7 may be less costly than filing for a Chapter 13 and then having to file a separate Chapter 7 if your Chapter 13 case was dismissed.
An experienced bankruptcy attorney will assess your case to make sure conversion makes sense for you. There can be major benefits to converting your case from a Chapter 13 to a Chapter 7, but it is critical to understand all the implications.