Chapter 7 Trustee Goes After 2009 Prospective Tax Refunds

Bankruptcy trustees may be more aggressively seeking your income tax refunds. Tax refunds are non-exempt money in most bankruptcy cases. If you file bankruptcy during the first four or five months of the calendar year, and you are due or expecting a tax refund for the prior tax year, the trustee will take your tax refund. The asset at issue is the refund that was due the debtor at the end of the prior year, based on the prior year’s income and withholding, to be reported on the income tax return. I have received emails from two attorneys reporting that a Chapter 7 trustee at a creditor meeting has required that the debtor pay the trustee the year-to-date portion of the debtor’s expected tax refund for 2009, even though the tax return is not due until next year and the amount of refund is not set until the end of the tax year.

The trustee has the right to the debtor’s 2009 tax refunds. There are several bankruptcy cases holding that at any time a debtor’s tax refund is property of the bankruptcy estate. The refund must be prorated so that only the refund attributable to the time prior to filing the petition is estate property. The law does not limit the trustee’s rights to prior years tax returns so that the trustee may go after your 2009 refund even though the tax year is not over. The issue is how to determine the amount of the 2009 refund before the end of the year. Many factors between the bankruptcy filing date and the end of the year may increase or decrease the debtor’s tax refund. A debtor may defend a trustee’s reach for current year tax return on the basis that the amount of refund is speculative until the return is filed next year. Most trustees will not want to keep open a large number of current bankruptcy cases until debtor’s tax returns are filed sometime in 2010. It will be interesting to see how bankruptcy courts handle this type of trustee collection effort.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida