Retaining income tax refund after bankruptcy

Written by James Hirby | Fact checked by The Law Dictionary staff |  

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What is not clear in this situation is what the debtor was told in the bankruptcy proceedings by the trustee and or the debtor’s lawyer.  Typically, taxes not yet filed with likely tax refund are listed as seize-able assets by the bankruptcy trustee.  We also do not know if the case was a “No Asset Case”, where the debtor has nothing of worth to seize, and no secured assets.  We also do not know if the trustee was able to assess the amount of potential tax refund and deemed it not worth pursuing.  Bankruptcy law and supplemental state bankruptcy law could have made the worth of the refund moot. We have no way of knowing.  Because of the short duration of the bankruptcy from filing to discharge, it looks like this was a Chapter 7 type of bankruptcy.  Chapter 13 bankruptcies usually extend out longer before a discharge occurs.  It is unusual because most experts see tax refunds as one of the first questions about available or potential assets.  Some exemptions around tax refunds in bankruptcies do exist, but more often in supplemental state laws.

Regardless, experts tells us people that an upcoming tax filing that has the potential for refund is typically listed by the trustee as an item on the “to be seized” list.  It is normal for the trustee to request two previous years of tax returns as a part of the analysis of the potential assets a filer has, as well as the potential for a refund.  It is possible that the trustee and the debtor’s lawyer had some type of discussion where tax filing and refund were discussed and this information did not get back to the debtor.  Since there is a definite awareness, the debtor is best advised to contact his or her lawyer and specifically ask the lawyer to ask the trustee what the situation is on this.  While many people disagreed, many others have experienced being surprised with a summons, a retraction of the discharge, another court appearance (of some sort), a “failure to tell the trustee” judgment, and a fine, all for assuming that if they were not told to give up the refund, then they did not have any liability.  Ignorance is rarely an acceptable reason, especially in connection with a bankruptcy, its laws, and its courts.

One last point to explore is the possible impact of a state’s supplemental bankruptcy laws and rulings.  Many states have some law or rule around an exemption for how much of a tax refund is vulnerable for seizure in a bankruptcy proceeding.  As in almost every situation, state laws in support of federal law differ greatly from state to state.  Some states have no state exemption on tax refunds and some have simple to complex rules.  To be certain about what applies and how it applies, a person filing for bankruptcy must have a lawyer who has deep experience.  It is worth the expense, usually.  A consultation, usually free, just makes good sense and is really a must.

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