Bankruptcy Planning-Tax Refunds, Plan Now

The  bankruptcy trustee wants your tax refund.  In many cases, the only asset of the debtor is the right to receive the next tax refund,  and you don’t want to be required to surrender it to the trustee.  Plan now.

What does this mean?  It is common practice to want to withhold enough taxes as forced savings so that the individual receives a large tax refund to pay property taxes, insurance, and other expenses.  But in bankruptcy, this savings effort can backfire.  For example, if a debtor files bankruptcy next January, 2011,  the trustee has a claim on the refund and may want to seize it if large enough. And this might go on for several years in a chapter 13,

What if I file a bankruptcy on October 1, 2010?  Can the trustee seize my refund even though I do not file the tax return until 2011? October 1 is 10/12  of the year 2010, so the trustee can keep your case open in 2011 to obtain 10/12 of the 2010  refund.  Plan now.

So as a Fort Lauderdale bankruptcy attorney,  I often advise the client to review the amount of tax withholding to avoid a large tax refund.  Lower withholding provides a better cash flow for current bills and prevents having a large enough refund that the trustee would want to seize. (Of course, I do not give tax advice and you should consult with the person who does your taxes if possible as to the appropriate amount of tax withholding so you do not end up owing IRS.)

Note that in Florida the portion of the tax refund that is from the earned income credit for low income workers is exempt from the trustee.  Don’t confuse this with the child tax credit, which is not exempt.

Bottom line, don’t create an asset for the trustee from your tax refund.

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