Tax Refunds and Bankruptcy: 10 most important things to know

  • tax refunds

Well, it’s that time of the year when the bills from the holiday season will soon be arriving in our mailboxes.  And, it is also the time of year when tax returns will be prepared and filed and tax refunds are eagerly awaited.  Here are the 10 most important things you should know regarding tax refunds and how bankruptcy affects them

(1) Beware – if a creditor has a judgment against you, they may be waiting for your tax refund to land in your bank account so that they can attach that bank account and get your tax refund.  I had a client, a single mother, who had this happen to her in Kansas with a $7,400 tax refund.  Her bank account was garnished the day after her tax refund landed in it.  Very sad.

(2) You don’t want to get a big tax refund back right after filing bankruptcy as it can cause complications in your case.

(3) In most cases, it is best for you to wait to file your bankruptcy case until after you have received your tax refund for the year.

(4) In many cases, all or part of an income tax refund received shortly after filing a bankruptcy case can be taken from you by a bankruptcy trustee to be to be disbursed to creditors in a bankruptcy case.

(5) Both Kansas and Missouri recognize that Earned Income Credit (EIC) is actually a government benefit and is exempt from being taken by a trustee.

(6) Missouri also recognizes the Child Tax Credit (CTC) as a government benefit and will allow you to keep any portion of your tax refund that is Child Tax Credit.  However, Kansas treats the CTC as just another portion of your refund that can be taken by the trustee.

(7) In Chapter 13 bankruptcy, the general rule of thumb for both Missouri and Kansas is that you want tax refunds received while you are in your Chapter 13 plan to be less than $2,500.  If your refunds are greater than that amount (both federal and state refunds combined), then you may have to turn over a portion of your refund to the Chapter 13 trustee.

(8) It is permissible to wait to file your bankruptcy until after you receive AND spend your tax refund.  There are many ways to legally and ethically spend your tax refund in a proper manner in the days just prior to filing bankruptcy.  The Bankruptcy Court expects attorneys to counsel their clients on the appropriate ways to spend a tax refund just before filing a case.

(9) Every year, some people dispose of their tax refunds in ways that create serious problems in their bankruptcy cases.  A good bankruptcy attorney will counsel you on what to avoid and keep those problems from occurring.

(10) The process of gaining approval from a trustee for a client to spend his or her tax refund that was received after filing a bankruptcy is not difficult.  However, depending on how quickly either the debtor’s attorney and/or the trustee act on the request to spend the tax refund, gaining that approval can take several weeks if not done properly.  We have a system as well as special analysis forms that we utilize to get our clients the approval from trustees in the quickest way possible.

By Jeff Wagone, W M Law President

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