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Debtors' Counsel Take Heed: Chapter 7 Debtors Must Schedule a Good Faith Estimate of the Value of Their Anticipated Income Tax Refund

In re Trudell, Bankr. W.D. Mich., Feb. 19, 2010 (Case No. 09-00340. Hon. Jeffrey R. Hughes).

Attorneys for bankruptcy debtors have a duty under the Bankruptcy Code to ensure that the information in the debtors' schedules is accurate. A recent decision from the Bankruptcy Court for the Western District of Michigan cautions debtors' attorneys that this duty extends to the disclosure of anticipated income tax refunds.

When the chapter 7 debtors filed their schedules, they indicated that they did not expect to receive an income tax refund. Several weeks later, the debtors filed their tax return, which showed that they were entitled to a $5,000 refund. The debtors subsequently amended their schedules to disclose the refund and to fully exempt it. Thereafter, the debtors spent their refund.

The trustee objected to the claimed exemption. Among other things, the trustee argued that the debtors amended their schedules in bad faith. The court disagreed and found that the debtors' omission was not intentional or reckless because they had not filed their return at the time of the bankruptcy filing and because they disclosed the refund once their return was filed.

Although the court found that the debtors' omission was not intentional or reckless, the court closely examined the role of the debtors' attorney, who had prepared the schedules. The court scheduled a separate hearing to determine whether to impose sanctions against the debtors' attorney for failing to estimate the amount of the tax refund in the schedules. The court concluded that "if a good faith estimate can be made, then counsel must insist upon debtor including that estimate in his schedules in order to comply with the certification now required of counsel." (Opinion at 9, emphasis added.)

The court concluded that the trustee's objection had been rendered moot by the expenditure of the refund. The court noted that the trustee should focus on whether the debtors can be held liable for the expenditure under Section 542 and whether the trustee could avoid and recover the transfer under Sections 549 and 550. Those issues were not decided in the court's opinion.

This case serves as a reminder for debtors' attorneys to ensure that schedules include a good faith estimate of the debtors' anticipated tax refund, even if the debtors have not yet filed their tax return.

Categories: Chapter 7, Western District of Michigan

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practice focuses on bankruptcy, municipal law, collections, and trial-level and appeals litigation. In the bankruptcy arena, she represents primarily Chapter 7 trustees. Laura has handled a wide range of trial and appellate matters for individual and business clients and has appeared before the U.S. Sixth Circuit Court of Appeals, the Michigan Court of Appeals, and the United States Bankruptcy Court for the Western District of Michigan, as well as Michigan circuit and district courts across the state.

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