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Ch7 - Can the Trustee take my wife's tax refund if I file alone for bankruptcy? Do I have to declare her assets?

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I live in Illinois I don't have any income but my wife does. I have old CC debt that belongs to me alone. I'm trying to work things out with my creditors in order to avoid BK but looks like a couple of them are looking to sue me. If I file BK I understand that my assets come in play and so does my wife's income as it is used for calculating the means test for the state but my question is does my wife's assets that are in her name alone count towards the BK estate ? Also since she works and we have 3 children she gets a sizable tax refund every year and she gets it deposited into her account (not a joint acct). Can the trustee take the tax refund or even a portion of it ? We file joint returns even though I don't have any income. If so is it better to file for bankruptcy before taxes?

Attorney Answers 6

Posted

Around Chicago, we have a judge that wrote an opinion essentially saying the refund is divided up by the amount of income and withholding that went into creating it. If your wife provided all the earnings for the refund, and assuming you don't have other earned income and educational credits, there's a good argument for saying the refund belongs to your wife. You can also just wait until you get the refund, spend it appropriately on necessary household expenses, and then file.

The dialogue on this website does not constitute legal advice nor does it form any sort of attorney-client relationship.

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Posted

Filing for BK before the tax return is filed makes no sense as you still need to declare the refund as an asset. If you file BK alone but joint returns the refund is only half yours. There are also certain exemptions you can use to keep the refund depending on the dollar amount.

You should seek a consultation with a BK attorney and also ask about filing Chapter 7 as married, filing individually and separate households.

I am considered a "debt relief agency". I help Illinois people file for bankruptcy under the U.S. Bankruptcy Code. The information contained in this web site is intended to convey general information. It should not be construed as legal advice or opinion. It is not an offer to represent you, nor is it intended to create an attorney-client relationship. Any communication sent via the Internet using this web site would not be confidential and would not create an attorney-client relationship.

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Posted

I agree with Mr. Benjamin. Use the Find A Lawyer tab on this website to find a reputable bankruptcy attorney near you and schedule a consultation.

The information provided herein is general information only and not legal advice. The information provided herein does not create an attorney client relationship and is not a substitute for having a consultation with an attorney. It is important to have a consultation with an attorney as the information provided in this forum is limited and cannot possibly cover all potential issues in a given situation.

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Asker

Posted

Thank you for advice but I'm looking for answers from qualified lawyers on this site who happen to practice in ILLINOIS. Telling somebody to go consult with a lawyer without giving any sort of knowledgeable opinion even if not a complete or satisfactory defeats the purpose of anybody asking questions here, after all this is what this site is all about.

Shaye Larkin

Shaye Larkin

Posted

The ILLINOIS attorney said the same thing. Telling someone they would be better off getting specific advice from an attorney (specific advice is prohibited on this website) is probably the best advice you will receive on this website.

Christopher Daniel Leroi

Christopher Daniel Leroi

Posted

Outstanding response by the lovely Ms. Larkin

Asker

Posted

Thank you again. FYI, I did consult with a couple of lawyer and the reason I am here is I was given conflicting answers and this was the reason I asked the question here in order to get some consensus. Without going to details, I got two totally conflicting answers during my free consultations on the question of the tax refund. One lawyer told me if I didn't have any income I would not have any tax refund and the other told me it would be "prorated" to the date of filing the BK petition. No lawyer is willing to give you any real advice or specific answers except some general info during the consultation and want you to hire them first.

Shaye Larkin

Shaye Larkin

Posted

I am sorry you are feeling frustrated. In bankruptcy it's often hard to say exactly how something is going to turn out because a lot depends on the trustee assigned to the case. I can tell you that only the portion of your tax refund to which you are entitled that accrued as of the day your bankruptcy was filed is property of the bankruptcy estate. So if a Debtor files bankruptcy in June, changes are good he has not accrued a tax refund for that year yet. But if he files in October, he may have. I agree with the other attorney that it is usually just best to wait until after you receive the refund to file bankruptcy because then you have control over how you spend it and can even use some of it toward your bankruptcy attorney fees.

Posted

There are four approaches that the Courts have utilized in apportioning ownership of a joint tax refund between a filing and non filing spouse (bankruptcy context), 3 of the approaches use some type of a % of contribution (eg. tax withholdings, overall income, or if parties filed separate tax returns) and 1 uses a bright line 50/50 approach. Unless, you have an event on the horizon that would impact your eligibility for Chapter 7 or would expose some asset to turnover to the Chapter 7 Trustee, you should wait as Mr. Benjamin has indicated. To the extent you need to file sooner than that, you should consult with local counsel. Mr. Benjamin has indicated that at least 1 judge in Illinois would find that you have minimal ownership interest in the tax refund.

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Shaye Larkin

Shaye Larkin

Posted

Good information from Mr. Taylor

Asker

Posted

Thank you for taking the time to respond. Seems like the majority here advice filing and receiving the tax refund before filing . Good advice but what about spending the money by my wife on things like paying off her credit cards, home improvement , vacations or even buying a car. Is she going to be scrutinized or does she have the right to do so.?

Posted

In the Southern District of Illinois, if you had no income for the year of the return and had no taxes withheld from income, then you have no interest in the joint refund from the Internal Revenue Service or the Illinois Department of Revenue. The refund belongs entirely to your wife, who had the income and the taxes from it withheld. It is not your personal property. As a result, the trustee would not have a claim against the refund because your wife's income tax refund is not part of your bankruptcy estate. As a result, it would make no difference whether you wait to file or not. See In re: Lock, Case No. 04-60906, Bankr. S.D.Ill. Opinions (2004).

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Asker

Posted

Thank you for the informative and straight answer. DOes this apply to southern Illinois only?

Posted

I agree with Mr. Lathram's answer entirely with respect to the Southern District of Illinois, where I too practice. However, bankruptcy courts in the Central and Northern Districts may take a different approach. In fact, judges within the same district sometimes disagree on what the proper interpretation of the statute is. However, the majority position seems to be that the refunds are apportioned between the filing and non-filing spouse according to their proportionate share of the income, which in your case means that none of the income would be subject to turnover to the Chapter 7 Trustee. Best of luck!

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