“I” Is For Income Tax Refunds

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Federal and State income tax refunds and credits are treated like a savings account for most people. Income tax refunds are used to catch up on bills, make repairs, or buy some necessary household items. Clients want to keep their income tax refunds, creditors want to garnish them, and Trustees like to seize them. Read on for the essential guide on how you can file for bankruptcy and keep your income tax refunds in Michigan.

Chapter 7 and income tax refunds.

Income tax refunds and credits are considered an asset in a Chapter 7 bankruptcy and must be listed on Schedule B as property even if you aren’t sure what they will be. If you forget to list and exempt them, you may very well lose them to the Trustee. It doesn’t matter what month you file, you need to schedule them pro rata. For example, it is June of 2012 and you file bankruptcy.  You have to list your anticipated refunds for 2012. In 2011 you received $3,000 in Federal and State tax refunds and credits. Using that as a your guide, list half of the prior year’s refunds. Remember, this is June in our example and half the year is up. After the anticipated refund is scheduled, exempt them using your Federal d5 wildcard exemption and you are all set. Most pro se clients and a lot of rookie lawyers make this mistake to their detriment.

Chapter 13 and income tax refunds.

Here in the Eastern District of Michigan tax refunds are not handled the same in Chapter 13s are they are in 7s. If you don’t live here, your local custom may treat them differently. Anticipated Federal tax refunds are considered disposable income and are turned over to the Trustee for distribution to your creditors for as long as you are in bankruptcy. State of Michigan refunds and credits are yours to keep. If you are in your Chapter 13 you may be able to keep your refund if you can show a need, for example, you need the money to make a necessary car repair, buy a new stove, or make a home repair. You will need court permission to do this. Do not spend the money without court permission. Here is a quick tip: If you are expecting a tax refund, try to hold off on filing your Chapter 13 until after you have filed your returns and received your refunds. You will have to turn them over in the future, but you can get them one last time. After your Chapter 13 is completed, you can stop turning them over to the Trustee.

Garnishment of income tax refunds.

Filing for bankruptcy protects you from creditor garnishments. But what if you haven’t filed yet and you are worried judgment creditors will try to garnish your refunds. Federal refunds cannot be garnished from the IRS. They can only be garnished from your bank account after you have received them. State of Michigan refunds and credits can be garnished by a judgment creditors. Usually in the Fall of each year, creditors file garnishments. If you would like to keep you state tax refunds and are going to file for bankruptcy here is a really simple solution to keep them from being garnished: File your State tax returns after you file for bankruptcy. It’s just that simple. You don’t have to file your tax returns by April 15th of each year if you are owed money. You have up to three years to file and get your past refunds without penalty. The filing deadline is for people that owe taxes.

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Christopher McAvoy is a Taylor,  Michigan attorney and consumer bankruptcy lawyer who helps people in the  Downriver area  file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info.

Creative Commons License photo credit: bixentro