Thursday, January 3, 2013

Tax Time and Bankruptcy...Is My Refund Protected?

Tax time is fast approaching and a common question is “Will I get to keep my tax refund if I file bankruptcy”?  With some careful planning you should be able to protect your tax refund from the Chapter 7 Trustee when filing bankruptcy.  Several factors do come into play so it is always a good idea to consult a bankruptcy attorney with regard to your taxes and bankruptcy.

A Trustee in a debtor’s bankruptcy case can intercept a tax refund for the benefit of the creditors.  To do so, the bankruptcy must have been filed prior to receiving and spending the tax refund.  Therefore, one sure way to protect your tax refund in a Chapter 7 bankruptcy is to file bankruptcy after the tax refund has been received and spent.  It is important to note that the refund must be spent on necessary living expenses and it is a good idea to keep a list of what the money was actually used for prior to filing bankruptcy.
Even if the bankruptcy case has been filed prior to receiving your tax refund the refund still may not be taken.  Some factors the Trustee will consider:

·        How much of the refund is Earned Income Credit?  EIC is protected and cannot be taken for the benefit of creditors.
·        Does the debtor owe past tax debt?  If so, the IRS or State may be entitled to the refund to offset liability.
·        How large is the refund?  The amount must be enough to be a meaningful distribution to creditors.  In Indiana the refund typically needs to be around $1,000 or more before the Trustee will be interested in taking it.
·        Can the debtor exempt any of the refund?  In Indiana each individual debtor may exempt up to $350 of intangible property.  Therefore, part of the tax refund may be exempt depending on how much other intangible property was owned by the debtor when the case was filed.
·        When was the bankruptcy filed?  The amount of the tax refund allowed to be administered by the Trustee is pro-rated over the year.  Therefore, the Trustee may only be able to take 75% for instance.

The rules can change from state to state and Trustees’ decisions can vary regarding the tax refund.  Therefore, to ensure your tax refund is protected when filing Chapter 7 bankruptcy, consult a local bankruptcy attorney.  A bankruptcy attorney will be able to determine when the best time to file will be and can give advice on how to spend the refund prior to filing the bankruptcy case.

If you have questions regarding bankruptcy in Indiana please contact Jackson & Oglesby Law at (877) 489-0908 or visit us at Jackson & Oglesby Law can assist you with all aspects of your bankruptcy case. If you have questions regarding Chapter 7 bankruptcy, Chapter 13 bankruptcy, stopping foreclosure or wage garnishment, avoiding liens, stopping law suits, discharging debt, etc. we can help! Please call us today for your free phone consultation to determine which bankruptcy may be right for you.


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  2. Hi, once I file chapter 13, how do I file a plan modification for emergencies that come up in order to keep my tax refund? What rights come into play here?

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