Keeping Your Tax Refunds In A Chapter 7 Michigan Bankruptcy

Keeping your Tax Refunds in a Chapter 7 Michigan Bankruptcy.

If you want to keep your refund from being seized by the Chapter 7 bankruptcy Trustee, you must read this. My clients in the Downriver area count on their tax refunds to catch up on bills, buy clothes for the kids, or even pay their property taxes. Here are 5 things you must know to keep your money.

1. Federal tax refunds cannot be garnished from the IRS but federal refunds can be garnished from your bank account once deposited. If you want to keep your federal tax refunds from a judgment creditor that is garnishing you, then avoid direct deposit and get a check sent to you. 

2. State refunds in Michigan can be garnished by a judgment creditor from the Department of Treasury. A judgment creditor doesn’t have to wait for it to get into your bank account. Only thing you can do to stop this type of garnishment is to file for bankruptcy protection. If you file after it is garnished and sent to the judgment creditor, you may be able to recover it as a preferential payment.

3. Disclose, disclose, disclose.  A tax refund or credit is an asset even if you haven’t received it yet. You must disclose what you think or know you will be getting on Schedule B of the bankruptcy petition and then exempt the refund on Schedule C. Failure to list a tax refund as an asset will likely result in losing your tax refund to the Trustee and your creditors.

4. If you are in a Chapter 13, you may be able to keep some or all of your Federal tax refund. As discussed in a prior post,  you must turn over  your Federal tax refunds to the Chapter 13 Trustee for distribution to your creditors. Your bankruptcy judge may allow you to keep it if you can show you need it. Maybe you need it for a necessary repair to the house, a repair to a car, or a new washing machine if your old one broke.

5. Prepare your tax returns. This sounds really basic but it’s critical. Bankruptcy requires all your tax returns to be filed by the Section 341 Meeting of the Creditors. Failure to do so can result in a dismissal of your case. Also, if you don’t know what you are getting back, you will not be able to protect it. Your Chapter 7 Trustee may keep your case open until the tax returns are done so he can see how much money he can seize.

Chris McAvoy is a Michigan attorney who helps people with bankruptcy, family law, and estate planning. To find out more or set up an appointment, click here for contact info. Our attorneys help people in Taylor, Allen Park, Southgate, Lincoln Park, Riverview, Taylor,  Trenton, Flat Rock, Wyandotte, Brownstown, Belleville, Dearborn, Dearborn Heights, Westland, Garden City, Canton and the Downriver, Michigan area.