Debtors should not maintain bank accounts at the same bank where they owe money on a credit card. The depository agreement provides a right of set-off against the account. In other words, if you owe Bank of America on a $5,000 credit card and you have a bank account with Bank of America, the bank can seize the money from your bank account.

Wells Fargo has been freezing bank accounts even if the depositor does not owe it any money when the depositor files bankruptcy. The bank is concerned that a bankruptcy trustee will claim the bank has a duty not to permit the debtor to use his or her bank account because the trustee might claim the money. A debtor might be stuck not being able to pay his bills because Wells Fargo denied access to the account. The validity of this freezing of the account is being litigated accross the country. Though it is unlikely for accounts with small balances that Wells Fargo would freeze the account, the best advice is don’t use Wells Fargo(and remember if you have a Wachovia account it is now Wells Fargo).

Many people assume that you cannot eliminate income taxes in bankruptcy. Actually, income taxes can be eliminated in bankruptcy under certain conditions. As a Fort Lauderdale bankruptcy attorney, I have helped individuals use the bankruptcy law to discharge taxes.

The basic rule is that the income taxes must be from a tax year more than three years ago. For example, for 2006 income taxes, the tax return was due on April 15, 2007. Add three years to April 15, 2010, and we can file bankruptcy after that date to eliminate these taxes. But there are other factors to consider to analyze the dischargeability of taxes. If the taxpayer filed an extension with IRS to file the tax return, the taxpayer must wait that additional time to commence the starting of the three year period. Also, there is a different rule for late filing taxpayers. The IRS debt cannot be eliminated unless the debtor waits two years from the time of filing the return. So if the 2006 tax return was not filed until April, 2010, the debtor must wait until April 2012 to file the bankruptcy to eliminate the tax debt.

I have been discussing eliminating the debt, but if an IRS lien is filed, the lien continues to attach to the property owned by the debtor at the time of filing the bankruptcy. A chapter 13 bankruptcy might be helpful in reducing the lien against property including a homestead.

There are other technical issues when examining how to treat IRS debt in bankruptcy, but the key point here is that bankruptcy can provide a remedy to income tax debt.

Millions of Americams have built up 401k retirement accounts and IRA’s.  I recently saw an article describing how more and more people have taken out loans against their 401K’s.  As a Ft. Lauderdale bankruptcy attorney, I have routinely seen clients who are strapped by payroll deductions for 401k loans.  Also, I have seen clients withdraw large sums of moneys from IRAs to pay bills.  This creates a tax penalty and income tax liability and also depletes retirement accounts.

Now it may often be true that these loans and withdrawals can solve the debt problem in particular cases.  But all too often these actions merely delay the inevitable crushing burden of debt.  Retirement assets are depleted, income taxes are owed, and the individual still must file bankruptcy. 

I strongly recommend that any one who considers borrowing from a 401k or making an early withdrawal from an IRA first consult with a Ft.Lauderdale bankruptcy attorney or other professional.

As a Fort Lauderdale bankruptcy attorney,  I have repeatedly seen clients attempt debt settlement plans where they pay for months to a company who first retains large sums of moneys as fees and  then holds  funds to try and settle at discounts, one creditor at a time.  Credit is still ruined, the clients often cannot continue to make payments, and the clients need to file bankruptcy after having  wasted their hard earned income.  If you can save money to settle, you can try this on your own.  (Be aware if you do settle you will receive a 1099 for taxable income for forgiveness of debt.)

On July 31, 2010, the Sun Sentinel reported that the Federal Trade Commission is cracking down on debt settlement companies.  Some of these companies have actually stolen client’s funds.  The new rules will prohibit companies from charging a fee prior to a settlement, require safeguarding of client funds in separate accounts, and disclose the time period it will take to settle.  Hopefully, these new rules will prevent abuses that have led to state attorney generals in over 20 states to sue debt management companies.   If you chose a debt management company and plan, be sure you understand the terms of the plan, consider whether the payment terms make sense, and attempt to verify the legitimacy of the company.

Consult an attorney prior to entering any debt management plan.

The  bankruptcy trustee wants your tax refund.  In many cases, the only asset of the debtor is the right to receive the next tax refund,  and you don’t want to be required to surrender it to the trustee.  Plan now.

What does this mean?  It is common practice to want to withhold enough taxes as forced savings so that the individual receives a large tax refund to pay property taxes, insurance, and other expenses.  But in bankruptcy, this savings effort can backfire.  For example, if a debtor files bankruptcy next January, 2011,  the trustee has a claim on the refund and may want to seize it if large enough. And this might go on for several years in a chapter 13,

What if I file a bankruptcy on October 1, 2010?  Can the trustee seize my refund even though I do not file the tax return until 2011? October 1 is 10/12  of the year 2010, so the trustee can keep your case open in 2011 to obtain 10/12 of the 2010  refund.  Plan now.

So as a Fort Lauderdale bankruptcy attorney,  I often advise the client to review the amount of tax withholding to avoid a large tax refund.  Lower withholding provides a better cash flow for current bills and prevents having a large enough refund that the trustee would want to seize. (Of course, I do not give tax advice and you should consult with the person who does your taxes if possible as to the appropriate amount of tax withholding so you do not end up owing IRS.)

Note that in Florida the portion of the tax refund that is from the earned income credit for low income workers is exempt from the trustee.  Don’t confuse this with the child tax credit, which is not exempt.

Bottom line, don’t create an asset for the trustee from your tax refund.