Income Tax Season For Chapter 7 Bankruptcy Trustees

Its tax season once again. In bankruptcy, tax season means hunting season for Chapter 7 trustees. During the first four months of year the Chapter 7 trustees are especially diligent about going after IRS tax refunds owed to debtors. The general rule is that any money, including income tax refunds,  owed to you at the time you file bankruptcy is part of the bankruptcy estate and available to pay your creditors. There are certain exemptions such as joint refunds where only one spouse files bankruptcy and refunds from the earned income tax credit. Bankruptcy trustees will ask all debtors if they expect a tax refund based on their 2009 tax return, and in most cases will require the debtor to send a copy of the 2009 tax return whenever it is filed.

I read a good blog post from Ohio bankruptcy attorney Wayne Novik about how debtors can best protect tax refunds. One option, discussed in the post, is simply to delay filing bankruptcy until you have filed your tax return and received a refund. You can spend your tax return on necessary expenses such as past-due mortgage or car payments or your bankruptcy attorney fee. Of course, if you receive a large tax refund the trustee may ask you to account for the money. As a practical matter, if you expect a small tax refund the Chapter 7 trustee will decide its not worth pursuing and will let you keep the money.

Comments

[Income tax retun]

Thanks for sharing a great article on income tax return.

[Bankruptcy Lawyer]

Diligence in filing your tax return is the only answer to the problem. And of course as mentioned there are a lot of ways to save too.

[Dale Cook]

My wife and I filed Chapter 7 bankruptcy and the case was discharged in December 2009. Our non exempt assets totalled $3000 and we are paying the trustee $250 per month. We are basically buying back our car and some furniture. Our sole source of income is my city pension and her Social Security disabilty payments. We over paid our federal withholding income taxes over the year and we received our overpayment refund check for $3100. The trustee now wants almost $2000 of that money.
Our type of income is supposed to be exempt from creditors or trustees on their behalf. How can he legally circumvent the protection that the law affords people like us on a fixed exempt income? My wife has MS and we need our money.

[Santa Barbara Bankruptcy Attorney]

Income taxes do cause difficulties for those who are not careful.There are certain exemptions such as joint refunds where only one spouse files bankruptcy and refunds from the earned income tax credit.

[Credit Solutions]

Thanks your posting , Income taxes realy trouble problem

[Richard West]

Income taxes do cause difficulties for those who are not careful. I am a board certified consumer bankruptcy attorney in Ohio, and see client's lose these refunds unnecessarily. However, not all clients need to wait. It depends on the applicable exemptions. For example, an Ohio family who gets back $5,000 may be able to file BEFORE they get the refund, if the refund is child tax credit and earned income credit, which is exempt. See www.debtfreeohi.com for more info.