Chapter 7 Bankruptcy Consequences For Earned Income Tax Credit And Child Tax Credit

Income tax refunds are part of the Chapter 7 debtor’s bankruptcy estate. Debtors who file Chapter 7 bankruptcy during the first four months of the calendar year and in November or December of the proceeding year should expect the Chapter 7 trustee to inquire about their anticipated income tax refund. In most cases, the debtor must agree in writing to send a copy of yet unfiled tax returns to the trustee and to hold any refund received until the trustee decides whether or not the refund is significant enough to administer for the creditors’ benefit.

Chapter 7 debtors can exclude or exempt whatever  part of an income tax refund is attributable to the earned income tax credit.  Most Chapter 7 debtors have low amounts of income relative to their family size, and therefore, many debtors received some EITC as part of a tax refund. Florida statutes exempt the EITC from creditors. The Chapter 7 trustee cannot take whatever part of a debtor’s tax refund which represents the EITC.

The IRS also gives taxpayers a income credit for based on amount of dependent  children in the family.  The child tax credit is $1,000 per dependent child. The child tax credit is not exempt under Florida statutes and is not exempt in bankruptcy. Debtor’s cannot protect from a trustee that part of their tax refund related to the child tax credit.

Be careful to distinguish between the earned income tax credit and the child tax credit when evaluating the amount of tax refund which will be taken by a trustee in your Chapter 7 bankruptcy.

Comments

[Sam Turco]

Good article. It is also important to warn debtors not to repay family loans with the tax refund until after the bankruptcy is filed since the Chapter 7 Trustee has the power to claim payments made to "insiders" (i.e., family members and business partners) made within one year of filing bankruptcy. Also, it is very important for debtors to be prepared to explain how they spent the refund, especially if the refund was sizable and if it was received shortly before filing bankruptcy. http://www.samturcolawoffices.com/blog/2011/12/dont-lose-that-tax-refund-in-bankruptcy.shtml

[Bankruptcy Attorney Portland Oregon]

Interesting wrinkle on the child tax credit. Typically, all things being equal, I might try and have the return received and spent before filing bankruptcy just to avoid this scenario. Of course, not all cases can wait.

[Morgan the bankruptcy lawyer]

Good article I was not aware you could not protect the child tax credit.