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HomeExclusiveWhen Filing Bankruptcy Can They Take Your Tax Refund

When Filing Bankruptcy Can They Take Your Tax Refund

How To Keep Tax Refunds In Chapter 7 Or 13 Bankruptcy

Filing Bankruptcy and Your Tax Refund

Home » How to Keep Tax Refunds in Chapter 7 or 13 Bankruptcy

In Bankruptcy, it is most likely that you will lose your tax refunds. In fact, debtors often lose tax refunds in Chapter 7 because the refund is so large it exceeds the amount of any wild card exemption. You are allowed to keep property that does not exceed the exemptions. Any property over the equity and exemptions you are allowed to keep the trustee sells or distributes to creditors. In Chapter 7 keeping your income tax refund is all about what you own at the moment you file the case and the allowed exemptions.

In Chapter 13, retaining your tax refund is about planning your budget and increasing your tax deductions. You are required to turn in a copy of your prior two years of tax returns whenever you file a Chapter 7 or Chapter 13 bankruptcy. In Chapter 7, the trustee looks through this tax return to find property or transfers of property. The refund is a property just like any other property you own. It is an unpaid debt to you which the government uses interest-free for a year. But in Chapter 13, it is also disposable income which should be paid to a Chapter 13 trustee for the benefit of creditors. In Chapter 7 or 13, you want to plan the timing and your exemptions so you never get a refund which can be lost.

Years Prior To Filing Bankruptcy

If there are unfiled tax returns for years prior to your bankruptcy, your bankruptcy trustee will ensure that the tax return is filed with CRA. CRA will send the refund to your trustee. If there is an amount owing on the tax return, it becomes a debt that is dealt with as part of your personal bankruptcy.

Consulting With A Bankruptcy Lawyer

Preparing a confirmable Chapter 13 planand completing that planisn’t easy, and most people need the assistance of an attorney. In this, and any other Chapter 13 situation, you’ll be well served to seek knowledgeable bankruptcy counsel.

For information about what you’ll pay in attorneys’ fees, read Chapter 13 Bankruptcy: How Much Does It Cost?

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When The Tax Refund Hits While Youre In Bankruptcy

Ideally, youll have very little tax refund left over by the time youve filed bankruptcy, and will avoid the plight of Mr. Ellman, below.

In Re Ellman involved a public school teacher in Baltimore, Maryland, who filed for chapter 7 bankruptcy and thereafter received a $15,827 tax refund. The case trustee filed a motion for turnover and the U.S. trustee appeared at the hearing in support of the trustees motion. The debtor argued that he relied on his tax refund for living expenses for the upcoming year and that his refund should be excluded from the bankruptcy estate as future wages.

Citing a long line of cases that include tax refunds as part of the bankruptcy estate, the court found the debtors argument unpersuasive and ordered that he turn over the funds minus approximately $10,000 he had available in unused exemptions. In total, Mr. Ellman was ordered to turn over $4,615 of his tax refund. To support its ruling, the court in In Re Ellman recited an uncontroversial rule of bankruptcy law that applies to tax refunds:

Income tax refunds are property of a debtors bankruptcy estate to the extent they are derived from withholdings from the pre-petition earnings of the debtor.

To put the courts words in plain English, tax refunds received for wages earned prior to filing bankruptcy are considered property of the bankruptcy estate and are subject to liquidation if no exemptions are available.

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So Can You Keep The Tax Refund If You File Bankruptcy


The answer to this question is maybe.

Personally, I hate the word maybe. During my single days, I always cringed when I asked a girl out on a date and the answer was maybe. Maybe meant I have to wait to see if I get a better offer.

But seriously, every bankruptcy case is different. Here is a part of my analysis. First, whether or not you get to keep your tax refund depends on what type of bankruptcy case you are filing. If you are filing a Chapter 13 bankruptcy that is paying all of the creditors 100 percent of what is owed to creditors, you get to keep all of your tax refund.

Second, it depends on the size of your refund and the amount of Georgia wildcard exemption you have in your case. All Chapter 13 filers will keep tax refunds that are less than $1,500.00.

Lets say you file a Chapter 7 bankruptcy. If you have a tax refund that you anticipate receiving before your case will be discharged, the tax refund must be exempted as an asset in your case. Every case is different.

As a general rule in Georgia, if your tax refund is less than $5,000.00, we should not have a problem. The Georgia wildcard exemption is $5,000.00. If you need the exemption on a different asset, you might have an issue in your case. However, you must remember that every case is different.

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Bankruptcy And Future Tax Returns

Whether future returns and refunds are affected depends on the type of bankruptcy filed. If an individual filed for Chapter 13 bankruptcy, the repayment plan may demand that for the first few years following the filing all or a portion of the tax refunds after bankruptcy be turned over and used to pay off debts.

With Chapter 7 bankruptcy, however, only tax refunds for income earned before filing are affected. The time at which the individual files for bankruptcy could result in a portion or all the refunds being seized. If, for example, the individual files for bankruptcy halfway through the year, the trustee can seize just half of that years tax refund, and the rest will go to the individual. If the individual files after the first quarter, a quarter of the refund may be seized and the rest refunded to the individual. All future refunds go directly to the individual, as with any other return.

Tax Refunds Are Assets Of The Bankruptcy Estate

There is nothing good about a tax refund. In the United States, we pay our taxes by having a portion taken out of each paycheck and paid over to the government all year long. Once a year, we file a tax return to tell the government how much we owed and how much we paid. If you are receiving a tax refund, it means that you overpaid your taxes and are entitled to get the excess back. A large refund means that you paid in a lot more than you needed to pay when you could have been keeping that extra money to live on.A tax refund is property of the bankruptcy estate. This is true whether you have filed your return and are waiting to get the refund, or whether you have not yet filed your return, but have already overpaid what you owe.

Tax refunds are favorite assets for trustees to take because they are easy to recover. If the refund is still owed to you, the trustee can get the IRS to pay the money directly to them. The trustee can also get a court order that requires you to give them the refund when you get it, and they can prevent you from getting a discharge if you dont give it to them.

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Possible Ways To Keep A Tax Refund In Chapter 13

Determining what to do with your tax refund is mainly discretionary, so your trustee might allow you to keep the tax refund. An unforeseen event or need that has affected your ability to pay living expenses might sway the trustee. For instance, it’s common for a debtor to need car repairs or a new vehicle at some point during the plan.

Even so, in most cases, the trustee will require you to contribute your tax refund as part of your Chapter 13 plan. As a practical matter, one of the only available preventive options in Chapter 13 is to adjust your employment tax withholding to decrease your tax refund. The smaller your refund, the less the trustee can take. But it’s best to do this before filing for Chapter 13. You wouldn’t want it to later appear as an attempt to hide bankruptcy income owed to your creditors.

Advantages And Disadvantages Of Bankruptcy

Bankruptcy & your tax refund

If youre trying to decide whether you should file for bankruptcy, your credit is probably already damaged. But its worth noting that a Chapter 7 filing will stay on your for 10 years, while a Chapter 13 will remain there for seven. Any creditors or lenders you apply to for new debt will see the discharge on your report, which can prevent you from getting any credit.

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Tax Obligations In Bankruptcy

Felicity is a 37 year old unemployed woman from Dandenong in Victoria. She is currently single and has no children.

For 8 years she was a sole trader running a small business as a pastry chef. Felicity struggled to stay on top of her bookkeeping and bills. As a result, personal and business debts built up until Felicity had no choice but to close the business.

Felicity ended up filing for bankruptcy. At the time she had not lodged a tax return for the past 4 financial years.

Felicity listed the Australian Taxation Office as a creditor on her bankruptcy form. She did not know how much she owed because of her unfiled tax returns. She estimated on her form that it would be about $150,000.

AFSA contacted Felicity to talk about her bankruptcy. AFSA explained that Felicity still needed to lodge her overdue and future tax returns in the normal way. AFSA does not do this for her and bankruptcy does not remove this obligation.

AFSA explained that most ATO debts are covered by bankruptcy. This means they do not have to be repaid . The ATO would still be a creditor in the bankruptcy, which meant that if any money became available to pay creditors, the ATO would get a share.

However, any tax refund Felicity is entitled to during her bankruptcy may be kept by the ATO. The ATO would use this money to pay off some of her tax debt. This would reduce the ATOs claim against Felicitys bankrupt estate.

Losing Your Tax Refund In Chapter 7 Bankruptcy

You can lose either part or the entirety of your tax refund when you file Chapter 7 in Indiana or other states that do not have a large cash or general intangibles exemption. The idea is simple: many states do not allow you to keep a lot in cash accounts or other monies owed to you when you file for bankruptcy. Therefore, if you have a tax refund that is going to be due to you in the future, it may exceed this low amount that your state allows you to keep. Therefore, they can take your tax refund in order to pay back some of your creditors.

How Does the Bankruptcy Trustee Calculate the Amount That I Will Lose of my Tax Refund in Chapter 7?

If your assigned Bankruptcy Trustee believes that you will have a tax refund that is large enough to repay some of your creditors, then he will plan to do a future calculation of your upcoming tax refund to see how much will be owed to your creditors. The Trustee will then return back to you the amount that is not due to your creditors.

The calculation is simple: it merely is a fraction of how far youre into the current tax year. Therefore, if you are approximately one half the way through the current tax year when you file, then the fraction may look something like this: 182/365. If you are only one month into the year, it may look like this 31/365. Whatever fraction or percentage is due to the creditors will depend on how far you are into the current tax year.

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Anticipated Income Tax Refund: $ 600000

  • An income tax refund that is still forthcoming to a debtor on the date of your bankruptcy filing becomes property of the bankruptcy estate. Thus, the bankruptcy trustee may be entitled to take a large portion of your tax refund, less any individual exemptions.

ANSWER: Those who take the time to consult with a Toledo, Ohio chapter 7 bankruptcy attorney before receiving an income tax refund check can make the most of their individual situation. A limited number of bankruptcy exemptions exist which may help protect some of your income tax refund check. Also, you may be allowed to strategically spend a portion of your income tax refund check on certain necessary expenditures, such as a needed car repair. Luxury expenditures, such as vacations and payments to family and friends should be avoided.

DISCLAIMER: Individual situations vary. The above is solely for educational purposes and is not to be construed as legal advice. Consult with a qualified Toledo, Ohio chapter 7 bankruptcy attorney prior to receiving your income tax refund check. France Law Group is a debt relief agency. We help people file for relief under the United States Bankruptcy Code.

What If The Ato Is A Creditor

Filing Taxes After Bankruptcy Discharge

Any refund you are entitled to during the period of bankruptcy may be retained by the ATO to offset any pre bankruptcy income debt and/or offset any Family Assistance or Child Support debts incurred. Any debt still outstanding to the ATO after your bankruptcy is discharged which formed part of the bankruptcy cannot be recovered by the ATO.

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Modifying Your Payment Plan To Pay For Unexpected Expense

If you have a Chapter 13 bankruptcy payment plan, sometimes things come up that you do not expect. Your household budget should include a certain amount for regular maintenance and discretionary expenses, but that may not be enough to handle emergency repairs. In these cases, you may be able to file a plan modification that will allow you to keep your tax refund and use it to pay for:

  • House repairs caused by natural disasters
  • Repairing or replacing household appliances
  • Car repairs following an accident
  • Unexpected medical costs for you or your spouse or children
  • Funeral costs

In these cases, you should expect to disclose the amount of the tax refund, the specific reason you need it, and the receipts showing you spent the refund the way you said you would.

Spending Your Refund On Necessary Expenses

Your bankruptcy trustee cannot seize money that has already been spent. If you have recently received a tax refund and are concerned that is might be seized in your imminent chapter seven case, consider spending it on necessary items and services for yourself and your family. While this isnt technically keeping the money in your pocket, it is transferring the amount into something you can keep, something that is unlikely to be eligible for seizure during your bankruptcy.

Having an expense deemed necessary may take some convincing of your local court system, but some general-accepted expenses include:

  • Payment toward mortgage, rent, home repairs and other basic living expenses
  • Utility payments
  • Food and drink, except for alcohol
  • Non-luxury clothing items

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Losing Your Tax Refund In Chapter 13

Chapter 13 filers, unfortunately, are more than likely going to lose their tax refunds. This is because they are engaged in a repayment plan with their creditors that lasts three to five years. Creditors are prioritized in Chapter 13, and as a consequence, its possible that certain creditors will only receive some repayment.

How much those creditors can get is often a factor of how much disposable income you have. Because a tax refund isnt taken into consideration when weighing your monthly expenses against your monthly income, it is considered disposable income. That means the bankruptcy trustee is likely to seize and use your tax refund to pay off your creditors.

Its possible to exempt your tax refund by designing a repayment plan that repays all of your debt. When you can afford the monthly payments and satisfy all debt within three to five years, there will be no need to seize your tax refund.

You can also ask for your tax refund to be excused from consideration in your Chapter 13 repayment plan. However, dont expect this to occur unless you have an expensive emergency and your tax refund can prevent you from sliding into further debt.

Is Your Tax Refund Disposable Income

What Happens to Your Income Tax Refund When You File Chapter 13 Bankruptcy?

People who file for Chapter 13 bankruptcy must pay all of their disposable income into the Chapter 13 planthat is, any income not used for reasonable and necessary expenses, such as food, transportation, and shelter.

When you receive a tax refund during a Chapter 13 bankruptcy, the trustee might consider those funds disposable income if they represent funds that weren’t included in the income and expense calculations used to support your Chapter 13 plan. Also, the Chapter 13 trustee might argue that since you can afford to pay all your necessary expenses and make your plan payment on your monthly income alone, the tax refund is a surplus and is disposable income that you must pay into the plan.

If you can show that the trustee’s analysis is incorrect, the court might find that the return isn’t disposable income and let you keep the money .

Example. For Ashley’s Chapter 13 plan to work, she must pay $1,000 per month to the trustee. Her income from work is just enough to cover her reasonable and necessary expenses plus the plan payment. She ends up falling behind and needs her tax refund to catch up on her electrical bill. The court might excuse the tax bill if she shows that she fell behind because she didn’t claim enough deductions and the money slated to pay her electric bill was withheld for unnecessary taxes. By contrast, it’s unlikely that the court will excuse the tax refund if Ashley received a raise and the tax refund represents money not accounted for in her plan.

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