As April 15 draws near, clients often ask “Can I keep my income tax refund in bankruptcy?” Depending upon the laws of your state and the amount of the refund, the answer often is Yes!
Here’s what you have to do.
Like everything else in bankruptcy, it is very important that you be completely open and honest with your attorney about your income tax refund. And it is also very important that your bankruptcy lawyer ask you about your income tax refund. There are two places in the listing of assets in bankruptcy where you might show that you have an income tax refund due you. One place is for an income tax return in an amount you have already determined. The other is for income tax in an amount to be determined – for example if you haven’t prepared your income tax return yet.
Your tax refund, like almost all of your property, will belong to the bankruptcy trustee and used to pay your creditors unless your bankruptcy lawyer can protect it using available exemptions. In Illinois and Wisconsin, the exemptions allowed are sufficiently generous to protect most people’s income tax returns most of the time. In addition, particularly refunds for child care credit and earned income tax credit are treated as welfare benefits in many states. Many states exempt welfare benefits from bankruptcy and creditors.
So if you are honest with your attorney about your income tax refund situation, there’s a good chance you’ll be able to keep it.
Lakelaw represents people in bankruptcy in Illinois and Wisconsin.
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Last modified: April 19, 2013