Tax refunds can be thousands of dollars that most people expect to receive each year and if you want to keep your refund from the bankruptcy trustee, you should read this post. My clients use this money to catch up on unpaid bills or utilities; getting stuck on the mortgage or rent; maybe a down payment on a car; or even home repairs or clothing for the children. If you want to keep your tax refunds, here are some things to know.
1. Federal tax refunds cannot be garnished from the IRS. They can be garnished from your bank account once you receive them. If you want to keep your federal tax refunds from a judgment creditor that is garnishing you, then avoid direct deposit and have a check sent to you. Cash Spend it. Store it in a mason jar under the chicken coop. Don’t put it in a bank account that you think a creditor is going to garnish.
2. State refunds in Michigan can be garnished by a judgment creditor of the Department of the Treasury. A judgment creditor does not have to wait for it to come into your bank account. The only thing you can do to stop this type of garnishment is file for bankruptcy. If you file it after it has been garnished and sent to the judgment creditor, you may be able to get it back as a preferential payment.
3. Reveal, reveal, reveal all assets. A tax refund or credit is an asset, even if you haven’t received it yet. You should disclose what you think or know you’ll get on Schedule B and exempt the refund on Schedule C. If you don’t include a tax refund on an asset, you’ll likely lose your tax refund to the Trustee. It is up to the trustee to give sixteen non-exempt assets for the benefit of the creditors.
4. If you are under Chapter 13, you may be able to keep some or all of your federal tax refund. You must give your federal tax refunds to the Chapter 13 Trustee for distribution to your creditors. Your bankruptcy judge may allow you to keep it if you can show that you need it. Maybe you need it for a needed repair around the house, a repair on a car, or a new washing machine if the old one broke.
5. Prepare your tax returns. This sounds very basic, but it is true. Bankruptcy requires that all of your tax returns be filed by the Section 341 Meeting of Creditors. Failure to do so may result in the dismissal of your case. Also, if you don’t know what you’re getting, you won’t be able to protect it. Your Chapter 7 Trustee can keep your case open until the tax returns are completed so he can see how much money he can garnish.
If you and your attorney know these basic rules, you are ahead of the game in keeping your tax refunds and credits. To learn more about bankruptcy, please take some time to visit my website at: Downdriver Bankruptcy.
