Can the bankruptcy trustee take your tax return?

Can the bankruptcy trustee take your tax return?

Clients often ask whether the trustee can take their tax refund. Yes–Maybe–Sometimes.

Chapter 7
In Chapter 7 cases, the answer is that it depends. The most effective weapon that I have to protect your return Georgia’s exemptions (meager as they are). If I can, I’ll protect your refund as part of your estate that is immune from the Trustee.

If I can’t protect it using Georgia’s exemptions, the trustee will get your refund if you receive it after filing. Translation: you may need to talk to me about timing the filing of your petition. If nothing else, I want you to be prepared for the Trustee’s interest in your money.

Chapter 13
In Chapter 13 cases, the answer is that the trustee will ask for any return received during the life of the plan. So if you’re in a 5 year plan, the Trustee will get your return for all 5 years. If you’re in a 3 year plan, the Trustee will get it for all 3 years.

What can you do about this in Chapter 13?
You should review your W4 with your employer to make sure that you are withholding the appropriate amount of Federal taxes from each paycheck. Depending on when you do this, and when your case is filed, you may be able to minimize the amount the trustee gets from your refund the year you enter Chapter 13. For the future years of the plan, you’ll need to do the W4 check each year.

Note that the trustee frowns on instances where a Chapter 13 debtor’s witholdings results in an obvious tax liability. Translation: it’s like Goldilocks. Your withholding should be set so you neither owe anything, or get anything refund-wise.

Want to know more?
Call my office at (404) 418-8879 to schedule your consultation with me–Attorney Shannon McDuffie.

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