Bankruptcy

Tax Refund May Be At Risk in Bankruptcy

By Jonathan

If you plan on filing bankruptcy after January 1 of next year or of any year, you need to speak with your lawyer regarding whether your income tax refund can be protected.   If you overpaid your taxes and are due a refund, that refund becomes your property on January 1, even if you have not yet filed your return.

If you file your bankruptcy after January 1, that income tax refund needs to be declared as an asset.

Often, income tax refunds can be protected by applying an ?exemption.?  Georgia has a fairly stingy exemption law, so if your refund totals more than $500 or $600, you should seek advice from your lawyer about whether your refund can be protected, and, if not, whether you should file your return, obtain your refund and use the money without putting yourself at risk.

Going forward, I usually encourage my clients to review their withholding numbers so as to avoid ending up with a large refund.   If you are getting a tax refund, that means you are giving the government an interest free loan.  In addition, if your refund is in the $4,000 to $5,000 range, the Chapter 7 trustee will take the position that you are using it as a kind of savings account and the trustee might object to your case on the grounds that you have unrevealed ?disposable income.?

In Chapter 13, the Atlanta trustees generally require a provision that directs the IRS to send all tax refunds to the trustee, so there is no advantage in setting your withholdings to create a large tax refund.

Bottom line: tax refunds can create bankruptcy issues, and the more time you have to plan how to deal with your refund, the better.

Full post as published by The BK Blawg on November 10, 2008 (boomark / email).