Many of my clients are concerned with the treatment of their tax refunds within a bankruptcy case. In a Chapter 7 “liquidation” case tax refunds are not exempt, which means that portion of the year’s tax refunds which remain unpaid can be taken from a client in a bankruptcy case. Earned income credit(s), or EICs, are exempt and certain types of child tax credits may be exempt in Colorado. These are exceptions to the general rule.
If it is toward the end of the year, or if you file a case in say February, a family could lose their entire tax refund by filing their case at the wrong time. Therefore it sometimes makes sense to wait to file a case in order for a family to get their tax refunds in the door before filing.
In a Chapter 13 or “repayment plan” bankruptcy tax refund can usually be kept during the life of the plan. However, because they would’ve been non – exempt in a Chapter 7, your bankruptcy lawyer will want to reconcile the anticipated tax refunds in your Chapter 13 plan.
There is nothing illegal or even morally wrong with planning a bankruptcy so that a client is allowed to keep the maximum amount of property possible, including the tax refund. This kind of “negative” estate planning is perfectly legal and accepted by the bankruptcy court in Colorado.
Earned income credit(s), or EICs, are exempt and certain types of child tax credits may be exempt in Colorado. These are exceptions to the general rule. In a Chapter 7 case, a person filing bankruptcy is also only concerned with one year’s worth of tax refunds (from the IRS and the Department of Revenue), it is not the case that you may forfeit all of the refunds you get in the future.
For working class families, tax refunds are an important part of savings for the year and your bankruptcy lawyer should be aware of your likely refund, both as to timing and amount so that appropriate planning can be done. All too often I see the results of clients being poorly informed on this issue, making arrangements at Court to turn over their refunds. This is largely avoidable with planning.
If your refund is anticipated to be small, and what is “small” changes but typically $400-$500 is the limit, many trustees will not bother collecting the asset, as doing so will not pay much of your debt in the bankruptcy case. But, because having an asset case (as opposed to a case where you do not turn over any property to the trustee) has other important consequences, the entire issue is best handled by avoiding it entirely by getting your taxes done and refunds in the door and spent on something useful. If you “owe” tax, it can also help you qualify for bankruptcy, so getting taxes filed is always part of my planning with clients.
Please call (303) 501 – 4028 anytime should you have questions about bankruptcy in Colorado. – Robert Gauss, (303) 501 – 4028.