Possibly, the trustee can take your tax refund according to the rules in Chapter 7 bankruptcy. This depends on whether the tax refund is protected under the Bankruptcy law by what are called “exemptions.” The trustee is like the lawyer for the creditors you who own the debt you are trying to discharge in your bankruptcy. His job, as their lawyer, is to try to get as much money from your assets so that he can to pay off the debts you are discharging; however, the law protects most of your non-luxurious assets in what are called “exemptions.” Exemptions are like pockets of money that the law allows you to keep, and which the trustee cannot take. These exemptions include $450.00 for cash, $1,225.00 for a wild card that can be applied across the board to any asset of you choice, child credits exemption and earned income exemptions. You can “stack” or add exemptions together to pay any single debt. Your attorney will try to protect your tax refund under one or more of these exemptions so you can keep as much of your refund as possible.
However, if your refund is above what is protected by these exemptions, the trustee may still be able to take the difference. To protect your tax refund from being collected by the trustee, wait to file until you collect it before filing for bankruptcy. In other words, once bankruptcy is filed, tax refunds automatically become liable for collection by the trustee for settling of your debts. Tax refunds which are from the prior year are included in the total property owned by you and are considered part of the assets to be used to service the debts. However, as stated above, you may be able to protect you refund or a large portion based on these exemptions.
There are different ways a trustee can attach a refund. In some cases, the refund is sent directly to you, and you will be expected to hand over the check to the trustee when you receive it. In other cases, the trustee notifies the Internal Revenue Service of your bankruptcy condition to intercept your tax refund; so, when it’s time to receive the tax refund, it goes directly into the trustee.
The best way to go about protecting your tax refund from being taken by the trustee is to talk to a Bankruptcy attorney before you file for Bankruptcy.
The blog explains that the trustee is authorized to take your tax refund unless it can be protected under exemption. Exemptions are like pockets of assets that the law allows you to keep which are protected from the trustee and from your creditors. It also advices you in such to seek the help of an attorney to better understand the whole process before you file a bankruptcy.
Attorney Eli Tamkin is a Cleveland bankruptcy lawyer. He has been practicing law since 1989 and in Cleveland Ohio since 1994. Since then, he has dealt with a variety of legal issues, including bankruptcy, real estate, divorce, personal injury, and probate. Many times, answering questions on bankruptcy draws on knowledge of other legal areas as well. His experience in these other areas, as well as in bankruptcy enables him to address your particular needs and to offer you advice that is applicable to your situation.