Can the Bankruptcy Trustee Take My Tax Refund?

Can the Bankruptcy Trustee Take My Tax Refund -- Lee Legal DC VA MD

Your income tax refund is basically an interest-free loan to the government. If you have paid more in taxes than you owe, then the government must repay you for your overpayment. Especially around this time of year, clients ask me the the same question. Can the Bankruptcy Trustee Take My Tax Refund?

Can the Bankruptcy Trustee Take My Tax Refund -- Lee Legal DC VA MD

The short answer is Yes. The bankruptcy trustee assigned to your case may be able to seize your income tax refund, depending upon two factors. First, what chapter of bankruptcy are you filing? And second, are you are able to fully exempt the refund?

Chapter 7 bankruptcy

In most Chapter 7 cases, your tax refund can likely be fully protected (or “exempted”). That means the Chapter 7 trustee will “abandon” your refund,and you will be able to keep it. If you do not fully exempt your refund, however, the trustee will request that the IRS send the refund directly to the trustee’s office.

Worse, if you have already received your refund, the trustee may demand that you pay the money back to the trustee. Obviously, this can cause significant hardship for those who have already spent their refunds. Even if you are due some portion of your refund post-distribution, the possibility of a long delay makes this an unattractive option.

Chapter 13 bankruptcy

Chapter 13 cases are a bit more complicated. If you have a confirmed Chapter 13 Plan that requires repayment of only a percentage of your debt, then the Chapter 13 trustee will likely require surrender of your entire refund over the course of the Plan. The trustee will use the proceeds to increase the percentage paid to your unsecured creditors. Income tax refunds in a Chapter 13 bankruptcy are considered “property of the bankruptcy estate.” Thus, the trustee will apply those funds toward payment of your Plan.

In a 100 percent repayment Chapter 13 bankruptcy case, however, the trustee has no interest in seizing your tax refund. If your income is demonstrably sufficient to satisfy your confirmed Plan, the trustee will allow you to keep your tax refund. Often adjusting income tax withholdings upon filing a Chapter 13 is appropriate.

Can the bankruptcy trustee take my tax refund?

Tax refunds are the assets most frequently captured by bankruptcy trustees. An experienced bankruptcy attorney can assist you in finding the maximum exemption or strategy to protect your tax refund.

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About Brian V. Lee 513 Articles
Brian V. Lee provides bankruptcy, foreclosure defense, business turnaround, and litigation services to clients in the District of Columbia, Virginia, and Maryland. Brian was the Washington, D.C. state chair of the National Association of Consumer Bankruptcy Attorneys from 2016 to 2018.