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When Will Bankruptcy Trustees Take Income Tax?

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Your well-paid lawyer is the initial source of information here. In a Chapter 7 bankruptcy, the trustee is the second source of information. That lacking, one can always go back to the court itself for understanding and clarity. There are quite a lot of contributions on many sites about this situation. Unfortunately, there is a lack of precision and clarity in both the questions and in the responses. One person stated with some clarity showing information where it specifies who has the right to seize your tax refund, and some of the situations in which this can occur. Federal bankruptcy law specifies what can and cannot be seized by a bankruptcy trustee in a Chapter 7 bankruptcy. States can set some limits to amounts that can be seized. As an example, many states apparently limit the seizure of a federal tax refund to $1,000 for a certain range of refund. Some states have no involvement at all. One very interesting and pertinent point is how the seizure of the tax refund occurs. In a Chapter 7 bankruptcy the assigned bankruptcy trustee and the court can ask about assets the debtor has, and, if any potential income or monetary gain, like a refund, is likely in the future. The tax refund goes on a list. This “incoming money in the future” also will or at least should have a time limit. Several people suggest that all of this is supposed to be documented so that the debtor knows what is expected now and in the future, and how far into the future this all goes. Once this is all arranged, not necessarily completed and settled, the bankruptcy court will state what has to be paid, document what will be written off, and then issue a bankruptcy discharge. This does not mean that the debtor has no more to pay. It simply means that the bankruptcy court involvement is complete. The bankruptcy trustee now must manage the execution of seizure and pay outs to the creditors based on the documented asset seizure plan. Any creditor who feels that it may be or have been slighted can file for a judgment against the debtor in the court, but within a certain, documented time limit. The creditor can ask the debt amount owed be required to be paid, with no time limit. In some rather rare cases the court will concur with the request. But, it is very rare because of the circumstances and criteria that must be met.

Another interesting point that came out in from several people is whether or not the debtor wants to be directly notified of pertinent information, or if all information goes only to the debtor’s lawyer. The debtor has a choice and apparently there is a form to be signed stating what the debtor’s decision is on this matter. This is brought up as some people related about not getting a notice from the trustee about a tax refund and the debtor spending the refund on outstanding debt or necessities, but it raised the concern that the debtor might be in some trouble for not responding to the trustee. The lawyer had forgotten to pass the information on to the debtor.


This article contains general legal information but does not constitute professional legal advice for your particular situation. The Law Dictionary is not a law firm, and this page does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

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