The timing of your bankruptcy filing is always critically important but sometimes there are things timing can’t fix.  Through litigation, the debtor attorneys in Colorado have established broader exemptions under the current statutory scheme.  For instance, you might be entitled to a $5,000 vehicle allowance but what if that vehicle is used in the operation of your business?  A $20,000 exemption might be available in such circumstances.  Or, for instance, if an exemption for a child tax credit tax refund  is written into the law then why is the US Trustee trying to limit that exemption under a contrived and nonsensical “above the line/below the line” mathematical formula?  The bankruptcy appellate panel has decided that won’t fly and that debtors are entitled to keep their child tax credit income tax refund.

When Congress passed bankruptcy “reform” in 2005, it created a complex method of determining which state laws a debtor can use for claiming property exemptions.  Exemptions are used to protect most property from the trustee when you file a Chapter 7 bankruptcy. Although a reading of the law is somewhat complex, it sets up scheme whereby one can determine whether the debtor can claim exemptions for the state where the debtor now lives — or alternatively whether the debtor must claim the exemptions for the state where he or she used to live.  It was intended to stop people like OJ Simpson from moving to a state like Florida where 100% of the value of the debtor’s home is exempt from creditor claims or claims of the bankruptcy trustee.

In actuality, there are a lot of states out there with exemption laws far more favorable from Colorado.  For instance, if you have a large income tax refund coming to you soon, Colorado provides no protection for that money.  The bankruptcy trustee might take every dime of it (except for EITC or child tax credit) unless you delay your bankruptcy case filing.  Sometimes a long filing delay isn’t feasible; for instance, if your paychecks are being garnished.

However, some other states have “wildcard” exemptions which apply to any property — including tax refunds.  William A. Morris P.C. recently represented a debtor from Virginia who was distressed to learn that Colorado law would not protect her $5,000 tax refund.  After tracing down her legal residence addresses for the past three years, and making the required statutory calculations under the bankruptcy code, it was determined that she could claim Virginia exemptions.  Using the wildcard exemption (CV 34-4 for “real and personal property” of any kind), she filed bankruptcy and her tax refund was safe.

We are always distressed when we see people at their bankruptcy hearings being grilled endlessly by the bankruptcy trustee after having either filed bankruptcy alone or with the help of a “document preparation service.”  Inevitably, the documents are incomplete or error-filled.  And in the end these debtors may lose thousands of dollars when they can least afford it.  It could have been prevented with competent legal help.