Bankruptcy and tax refund: 5 things to know

Tax payments can be thousands of dollars that most people expect to get each year, and if you want to keep your refund from the bankruptcy trustee, read this post. My clients use this money to collect bills or unpaid utilities; being caught on the mortgage loan or rent; maybe a payout on a car; or even home repairs or clothes for the kids. If you want to withhold your tax refunds, here are some things you need to know.

1. Federal tax refunds cannot be garnished by the IRS. They can be embellished from your bank account when you receive them. If you want to keep your federal tax refunds from a court creditor adorning you, avoid direct deposit and have a check mailed to you. Discard it. Use it. Store it in a mason jar under the henhouse. Don’t put it in a bank account that you think a creditor is going to embellish.

2. State reimbursements in Michigan can be garnished by a court creditor from the Department of Treasury. A judgment creditor does not have to wait for it to enter your bank account. The only thing you can do to stop this type of decorating is to file for bankruptcy protection. If you file after it is embellished and sent to the judgment creditor, you may be able to recover it as a preference payment.

3. Inform, reveal, disclose all assets. A tax refund or credit is an asset even if you haven’t received it yet. You must disclose what you believe or know that you are getting plan B and excluding the reimbursement in schedule C. Failure to record a tax credit in an asset is likely to result in you losing your tax payment to the administrator. It is the administrator’s job to seize non-exempt assets for the benefit of the creditors.

4. If you are in Chapter 13, you may be able to retain part or all of your federal tax refund. You must turn your federal tax refunds to the Chapter 13 administrator for distribution to your creditors. Your bankruptcy judge can allow you to keep it if you can show that you need it. Maybe you need it for a necessary home repair, a car repair, or a new washing machine if your old one broke.

5. Prepare your tax returns. This sounds really basic, but it is true. Bankruptcy requires that all your tax returns be filed by the § 341 Creditors’ Meeting. If you do not, you can dismiss your case. If you don’t know what you’re getting back, you can’t protect it. Your Chapter 7 Trustee can keep your case open until the tax return is completed so he can see how much money he can intervene.

If you and your attorney know these basic rules, you are ahead of the game in preserving your tax refunds and credit. To learn more about bankruptcy, you can take some time to visit my website at: Downriver bankruptcy.