Protect your income tax refund in bankruptcy

29 Jan Protect your income tax refund in bankruptcy

If you file a bankruptcy case between January and April, you may be expecting a tax refund.  If you want to keep your tax refund in bankruptcy, read on.  Your bankruptcy trustee wants to take your tax refund from you.  Tax refunds are perhaps the largest single type of asset which debtors lose in bankruptcy.   These days, you might also be expecting an economic stimulus payment.

What should you do?

First, tell your bankruptcy attorney if you are expecting a tax refund.  Your attorney should ask but make a point of disclosing.  If the tax refund is small enough, it might be exempt under your state law.  Illinois allows an exemption of up to $4,000 which can be applied to any asset.  Wisconsin allows reasonably liberal exemptions under both state and federal law.  Your state may too.

If your tax refund includes “earned income credit” or “child care credit,” you may be entitled to additional exemptions in states which consider these to be welfare benefits.

You could wait to file your bankruptcy until after you spend your tax refund on family necessities as well.

What you don’t want to do is to fail to disclose the tax refund at all.  A bankruptcy trustee can simply write to the Internal Revenue Service and have it send the tax refund directly to the trustee.

You can best protect your tax refund by telling your bankruptcy attorney that you are expecting one.  Then you can decide the best path to take consistent with your legal obligations.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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