IF I FILE BANKRUPTCY, WILL I LOSE MY TAX REFUND?
Written on February 10th 2011
The answer to this question is…Maybe. In Ohio, only a portion of your income tax refund is “safe” from the bankruptcy Trustee. For example, any portion of your tax refund that is attributable to Earned Income Credit (EIC) or Child Tax Credit, is protected. In addition, any part of your tax refund that was earned after your bankruptcy was filed, cannot be taken. It may also be possible to protect more depending on how your cash and wildcard exemptions are used. (Exemptions are neat little laws that protect your “stuff” from the Trustee.) If you are filing a Chapter 13 bankruptcy, our local trustee limits the amount you are permitted to keep despite your exemptions.
Sometimes the easiest way to handle this issue is to wait to file your bankruptcy until after you have received your tax refund and used the money on necessary expenses. Necessary expenses do NOT mean paying back your mom for helping you out last year or giving it to your buddy for driving you around while your car was broken down. You must document where the money was spent and remember to avoid paying that money to family or friends, or in some instances, even your creditors. It is also important to remember that Refund Anticipation Loans (RAL) provided by H&R Block, etc. are NOT your tax refund. They are exactly what they say….LOANS from a bank. Those loans are paid back to the bank by the IRS with your tax refund. This is an important distinction.
Sometimes it may not be possible to wait. You may be facing a foreclosure sale or an auto repossession or even a wage garnishment. How do you decide what to do? Tax refunds in bankruptcy can be very confusing! My suggestion…talk to a bankruptcy attorney. Make an appointment for a free consultation and we will review your situation in its entirety and in detail and advise you as to the best way to proceed to maximize your tax refund.
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