Bankruptcy

Tax Refunds and Bankruptcy Part One

By Wayne Novick Ohio Bankruptcy Lawyer

Its that time of the year when Trustees begin to look for the easy pickings, the hanging fruit of bankruptcy, THE TAX REFUND.   If you live in a state like Ohio with limited exemptions your TAX REFUND may be in jeopardy.  The Chapter 7 trustee get very excited at this time of the year. Often bankruptcy cases are filed with a non-exempt tax refunds waiting to be taken.  Here in Ohio opening a bankruptcy estate for $1000 is not uncommon.  There are important steps you can take to protect your refund.  Ohio has very poor exemptions.  On September 30 2008 they went from the dark ages to medieval times.  Exemptions are the amount of equity or value  that you can protect in an asset.   Ohio only allows a $400 cash on hand exemption and  a $1075 wild card exemption.   On September 2008 Ohio added the ability to exempt the child tax credit and the unearned income credit. Even with these exemptions the Chapter 7 trustee are now looking for big tax refunds. Sometimes they are even looking for little refunds.

How does this work:  Jerry G  files his bankruptcy on January 30 2010.  The tax refund is consider part of his bankruptcy estate under the following examples. ( The law views the refund as part of the bankruptcy even if the refund has not been received and even if you do not know if you are owed a refund.  Filing an extension does not help.)

1.  Jerry has not filed his return.  The refund would be property of the bankruptcy estate

2. Jerry has filed his return but has not received his refund.  The refund would be property of the bankruptcy estate.

The trap.  A bankruptcy filed in the second half of  year generally after September can create problems with the tax refund.  Example Jerry G fies his bankruptcy on  October 31.  83 % of that refund can be considered property of the bankruptcy estate.  Again even though no return has been filed the view is that on the day the debtor file his bankruptcy he is entitled to 83% of the refund.

The timing of the filing of the bankruptcy case  and the timing of the filing of the tax return are important to protecting the refund.  part two will show ways to protect the refund.

Full post as published by Bankruptcy Law Network on January 21, 2010 (boomark / email).