Getting a Tax Refund? - Speak To Your Attorney Before You File For Bankruptcy

The next few months will bring us into tax season. Don't think so? Then you're not thinking about the ramifications of your tax refund on your bankruptcy. The fact is that for cases filed from about November 1 through April, the issue of tax refunds has to be considered. Here are a few of the basics about whether or not you'll get to keep that tax refund.

As an initial matter, your bankruptcy trustee has an interest in your tax refund. The trustee's job is to find any property that is not exempt, seize it, liquidate it and use the proceeds to pay back your creditors. Although some trustees are more aggressive than others in pursuing property, they all look at tax refunds as a way to bring some money into the bankruptcy estate.

Here are some of the important things to know. First off, if your case is filed before the end of the year, then the trustee will only be entitled to a prorated portion of the refund. For example, if you filed on December 1, 2010, the trustee would only be entitled to pursue roughly 91% of your 2010 refund (11/12th). Got it? And every day that passes, he or she will be entitled to pursue a greater percentage. If you file after the first of the year (e.g. January 1, 2011), then the starting point for the trustee is the entire refund.

There is, however, good news. A debtor's best friend in bankruptcy (beside their attorney) is the exemption. Let's look at some of the specific exemptions that we use in Ohio to keep some, or all, or the tax refund out of the hands of your bankruptcy trustee.

EXEMPTIONS

An exemption is a legal right for the debtor to place certain property beyond the reach of creditors or the bankruptcy trustee. There are exemptions listed in the Bankruptcy Code for certain property ("Federal exemptions") and exemptions for individual states as well. For the most part, in Ohio we use the exemptions provided for by the Ohio Revised Code, most of which are contained in Section 2329.66. The practical effect of these exemptions is that the debtor gets to retain certain property he or she would otherwise have to surrender. The good news is that oftentimes debtors in Ohio may not have to surrender any of their tax refund to the bankruptcy trustee.  Some of the relevant exemptions are as follows:

• Cash on Hand (ORC 2329.66(A)(3)) - Allows a total $400 exemption for cash on hand or tax refunds
• Wildcard (ORC 2329.66(A)(18)) - Allows the debtor an exemption of $1,150 in any property
• EIC and Child Tax Credit (ORC 2329.66(A)(9)(g)) - Allows an unlimited exemption for amounts attributable to Earned Income Credit or Child Tax Credit

For many people, these exemptions are enough to cover the entire refund. If not, you may have to turn some of the refund over to the trustee. This means that you're in the middle of your bankruptcy case and you have to write a check to the bankruptcy trustee. That's something nobody wants to do. Fortunately, you sometimes have the ability to time your bankruptcy to keep even the non-exempt portion of your refund from the trustee.

TIMING

There are actually instances in which it may benefit a debtor to wait to file for bankruptcy. If a debtor has filed their tax return, but not received their refund, their attorney should analyze their refund to see how much is exempt. If the debtors stand to lose a significant portion of their refund to the trustee, I often advise them to wait until they receive their refund to file. If they receive their refund after they've filed, then the trustee will seize the entire non-exempt portion. If they get their refund first, then they will have a chance to spend it down before filing their case. If this is the case, I always advise debtors to keep track of what they've spent their refund on, as the trustee will want to know. And, of course, one great way to spend your refund . . . pay your bankruptcy attorney. However, there are often legitimate expenses that debtors can spend their refund on pre-petition. These may include groceries, utilities, insurance, clothing, car repairs or any necessities. It is NOT, however, a good idea to spend your refund on a big-ticket item or to re-pay friends or family members right before filing for bankruptcy.

Although the trustee is always seeking ways to get a portion of your tax refund, most debtors and their attorneys, using the proper exemptions and timing, can avoid having to turn over their tax refund and put it to use giving themselves a fresh start.

I'm an experienced Canton bankruptcy attorney who's filed or managed over 1,000 cases. For more information on Chapter 7 and Chapter 13, call me at 330-605-3508 or visit my website at http://www.ohiobankruptcyrelief.com/.