Will The Bankruptcy Trustee Take My Tax Refund?

Question:

I filed Chap 7 bankruptcy on 12/28/09. We had no assets to protect outside of our Homestead.  We are unexpectedly getting a tax refund of 4,500.  We are surrendering our vehicles in the bankruptcy and this money would represent the only means of replacing our transportation.  Our 341 meeting is on 2/10/10 and we will be receiving our refund check on 2/12.  Will the trustee ask about this at the 341 meeting?  He only asked for our 2008 tax return in advance.  Thanks so very much.

Answer:

Tax refunds are assets just like any asset in bankruptcy, the same analysis applies.

1. What is the value of the asset?

2. If the value is more than zero, is the tax refund part of the bankruptcy estate?

3. If yes to 2; is the asset exempt?

4. If no to 3, is the asset encumbered by a security interest?

5. If no to 4, can the asset be transferred, spent, or exempted prior to filing bankruptcy?

6. If no to 5, hope and pray the trustee doesn’t care enough to take it.

For tax refunds, the analysis is fairly simple. The value is easy to determine; the debtor need only complete her tax return. In chapter 7 bankruptcy, the tax refund that would be received closest to the time a debtor filed is part of the bankruptcy estate. Thus, starting around August, 2009, the bankruptcy trustees start looking at the tax refund that would be received in 2010. The key to tax refunds is exemption; your state either has an exemption or it doesn’t. If there is no exemption, the tax refund can be taken by the trustee. If there is no exemption, then the best strategy is to receive it and spend it before filing bankruptcy. See this post, Tax Refunds and Bankruptcy, What Can I Do With a Tax Refund?

Unfortunately, you have already filed bankruptcy. The trustee will most definitely ask you about your 2009 tax refund? Because you filed bankruptcy in calendar your 2009, the trustee asked for your 2008 tax return since that was the only tax return due at that time. However, you need to get with your attorney as soon as possible to review your options; reason being, if you spend your tax refund now that you are in an active bankruptcy, the bankruptcy court may consider that act bad faith and dismiss your case, or worse, deny your discharge. Denial of discharge means that none of the debts included in your bankruptcy will be discharged, EVER!