03 Feb Tax Refunds as Assets
Tax refunds are assets that may belong to the trustee. If you are expecting a tax refund it is considered to be an asset that can be used to pay back your creditors. It is crucial that you let your attorney know if you expect a refund for 2006 or any other year. Your refund must be received and spent before the bankruptcy is filed if your attorney cannot protect the refund through an exemption.
This means that your attorney must exempt the property or protect it so that the trustee cannot take the asset. Some states have what is called a “wild card exemption” or “head of household” exemption which can be used to protect the refund. In some cases the refund maybe so small that the trustee will not want the refund because it costs too much time and energy to distribute the small portion to all your creditors.
In a Chapter 7 the trustee can take any portion of the a refund due and owing up to the date of the filing of your bankruptcy. The trustee may not have any portion of a refund for any years after you file the bankruptcy. However, this can get tricky as you enter the second half of the year. Trustee’s generally start asking about tax refunds for the that current year in August on forward because you have already spent half a year earning and paying taxes.
In a Chapter 13 many districts require that you turn over a tax return to the trustee each and very year during the life the plan. It is then up to the trustee to decide whether or not you can keep the refund.
Currently there is a case before the Court of Appeals for the Eight Circuit called In re Benn. The Eastern District of Missouri decided that refunds are not assets of the debtor’s estate and therefore the trustee may not take the tax refunds regardless of when the refund is received. As the case is on appeal and therfore a final decision is still pending, trustees in Missouri are placing the tax refunds into an escrow account if they feel have a right to the refund. The refund will be held in escrow until a final decision is rendered. The bottom line is the debtor will not know if they get the refund back or if the trustee gets to keep the refund until the final decision is handed down.
Don’t take the chance of losing your refund. Talk to your attorney so you can work together to plan how to handle the refund situation.