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 www.IndyBankruptcyLaw.com. 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.
