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Tax refund considered Income for Waiver of Filing Fee Purposes: In re Brooks

A debtor's attempt to have her bankruptcy filing fee waived was ultimately denied by Judge Bucki in Buffalo, after it was revealed the debtor was entitled to a large tax refund when the case was filed. This tax refund was treated as income, at least for the purpose of determining eligibility to have the filing fee waived, and the reasoning of the case could potentially be applied elsewhere. In re Brooks, WDNY Bk #12-10456; Hon. Carl L. Bucki; decision July 19, 2012.

The debtor filed bankruptcy February 17, 2012. She was represented by an attorney, who had charged $915 for his services. The debtor filed an application for waiver of the $306 bankruptcy filing fee, under 28 U.S.C. §1930(f)(1), which states "the bankruptcy court may waive the filing fee in a case under chapter 7 of title 11 for an individual if the court determines that such individual has income less than 150 percent of the income official poverty line . . . and is unable to pay that fee in installments". Therefore, the debtor must show both that he or she is under the 150% of the poverty line and is unable to pay the filing fee even in installments. Even then, the waiver is discretionary ("The court MAY waive. . .")

In this case, the judge initially waived all but $60 of the filing fee. The $60 was that portion of the fee that is allocated to the chapter 7 trustee. The judge reasoned that the trustee should not work for free if the debtor's attorney is being paid.

However, the court was later notified by the trustee that the debtor was entitled to a $9,046 tax refund for 2012, information not listed on the schedules or the Statement of Financial Affairs. The debtor received the funds on February 1 and February 10 in two tax refund anticipatory loans from the tax return preparer. The cost of the loan itself was $400, which means if the debtor had simply waited a few weeks until she received her refunds directly from the IRS and NYS she would have saved more than the entire bankruptcy filing fee.

The debtor used part of her refund to buy a bed ($975) and a TV ($800), catch up on her car insurance ($2,000) and pay her bankruptcy attorney. The balance of the refund, around $3,900, was allegedly spent on household expenses between the time she received the loan and the filing of the petition a week later.

Needless to say, the Judge was bothered by this information. His opinion states that the statement of financial affairs and the schedule of income contained "several material misrepresentations." The assignment of the tax refund to the tax preparer, as security for the tax refund anticipation loan, was mentioned nowhere; not as an assignment, not as a transfer, and not as an asset secured by a claim.

Furthermore, the judge clearly indicated that this tax refund should have been included in the income calculation for the fee waiver. The judge noted that Schedule I, the schedule of ongoing income, does not have a line specifically including tax refunds as part of the income calculation: "Unfortunately, as presently constituted, these forms do not unequivocally demand an accounting for recent tax refunds. Nonetheless, better practice would have incorporated a prorated portion of the refund into the debtor's statement of income." (Opinion, page 6.)

Judge Bucki, at least, will insist on this information in future fee-waiver cases: "As to all future cases, counsel should anticipate that this court will look to consider the debtor's most recent tax refunds as factors in determining whether the debtor can satisfy the requirement of 28 U.S.C. §1930(f)(1), that a waiver be granted only when a debtor is unable to pay the filing fee in installments." (Opinion, page 6.)

The opinion does not state why the debtor was entitled to such a large refund, but presumably it was an earned income tax credit refund, available to low income workers with dependents. These cases present tricky scenarios, and a debtor who expects a sizable tax refund in the next tax year should consult an experienced bankruptcy attorney to make sure there are no problems with the bankruptcy.

If you are considering a bankruptcy filing in Rochester NY, and are anticipating a large tax refund, you may contact me for a phone analysis, at no charge, of your bankruptcy options.

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