Bankruptcy and Tax Refunds: 5 Things You Need to Know
Tax refunds can be thousands of dollars that most people count on receiving each year, and if you want to keep your refund from the receiver, you need to read this post. My clients use this money to catch up on bills or unpaid utilities; to foreclose on you for a mortgage or rent; maybe a down payment on a car; or even home repairs or clothes for the kids. If you want to keep your tax refund, here are some things you should know.
1. Federal tax refunds cannot be garnished by the IRS. They can be topped up from your bank account once you receive them. If you want to keep your federal tax refund from a judgment creditor who is foreclosing on you, then avoid direct deposit and get a check mailed to you. Redeem it. Spend it. Store it in a jar under the coop. Don’t put it in a bank account that you think a creditor will seize.
2. State recoveries in Michigan may be garnished by a creditor pursuant to a judgment by the Department of the Treasury. A judgment creditor doesn’t have to wait to get into your bank account. The only thing you can do to stop this type of lien is to file for bankruptcy protection. If you file after it has been garnished and sent to the judgment creditor, you may be able to recover it as a preferential payment.
3. Disclose, disclose, disclose all assets. A tax refund or credit is an asset, even if you haven’t received it yet. You must disclose what you think or know you will receive on Schedule B and release the refund on Schedule C. Failure to include a tax refund in an asset is likely to result in your tax refund being lost to the trustee. The trustee’s job is to seize non-exempt assets for the benefit of creditors.
4. If you are in Chapter 13, you may be able to keep some or all of your federal tax refund. You must give the federal tax refund to the Chapter 13 trustee for distribution to your creditors. Your bankruptcy judge may allow you to keep it if you can prove you need it. Maybe you need it for necessary house repairs, car repairs, or a new washing machine if your old one broke.
5. Prepare your tax returns. This sounds really basic, but it’s 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 your case being dismissed. Also, if you don’t know what you’re getting back, you won’t be able to protect it. Your Chapter 7 trustee may keep your case open until tax returns are ready so they can see how much money they can seize.
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 a moment to visit my website at: Bankruptcy down the river.
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