Bankruptcy Tax Refunds: Keep ‘Em Small
Keep tax refunds small if you're thinking of filing for bankruptcy
Keep Bankruptcy Tax Refunds Small
It’s important to minimize your income tax refunds, whether you’re getting ready to file a Chapter 7 case or you’re already in a Chapter 13.
In Chapter 7 bankruptcy, tax refunds are probably the most likely asset to be taken by the trustee. This presents a couple of real problems, one practical, one legal:
- You probably rely on your annual tax refunds for annual costs or just to get current on your bills. If the bankruptcy trustee takes the refund, this will clearly not work!
- The legal difficulty is that if the trustee takes and distributes ANY of your assets to creditors, you now have an “asset” case, as opposed to a “no-asset” case. Without going into detail here, you really, really want a “no-asset” case.
In many states, the Chapter 13 trustee will expect you to pay all or part of your annual refunds into your plan (in Utah, annual refunds over $1,000.00 are paid to the trustee).
It is quite common these days for a large portion of your bankruptcy tax refund to be attributable to the Earned Income Credit. While you can control how much of your wages are withheld, and thereby directly control the amount of your refunds, it’s not widely known that you can do the same, more or less, with the EIC.
Right now, yes, RIGHT NOW (or tomorrow or Monday), get a W-5 form from your employer and complete it ASAP. The W-5 (assuming you meet all the requirements) allows you to immediately start receiving a portion of the annual EIC IN EACH PAYCHECK. You’ll receive your pay PLUS a portion of what would otherwise be your income tax refund next spring.
Your refunds next year will be smaller, but you’ll be able to have and spend the money now rather than giving it to the bankruptcy trustee later. Your bankruptcy attorney will be impressed and will thank you!
Mark Emmett, Salt Lake City bankruptcy attorney
SEE ALSO:
