Can I keep my Tax Refund in Indiana after a Chapter 7 Bankruptcy
Why do I have to give up part or all of my tax refunds?
Chapter 7 bankruptcy is a liquidation. By filing the case, you are asking the court to look at everything you own (your assets) and determine if any of your assets can be used to pay creditors. This may require the court selling or taking things from you in order to pay your creditors. As of the day your bankruptcy is filed, everything you own technically belongs to your bankruptcy estate.
The Trustee is the person who is in charge of administering this estate in a way that best helps your creditors. Until the Trustee abandons (returns) property to you, it belongs to the bankruptcy estate.
Your assets include your furniture, clothing, personal items, cars, home, 401k, checking and savings accounts, money owed to you, etc. Everything you own is an asset. In most cases, you can protect many of your assets using your state’s exemptions. Your attorney helped you determine how to use your exemptions to protect as much of your property as possible from sale or use to pay creditors.
Unfortunately,Indianaonly allows us to protect (exempt) $350 of “intangible" assets per person. If you filed jointly, you were able to protect $700 of your intangible assets. These are assets like your bank accounts, cash on hand, and money owed to you, most commonly in the form of a tax refund owed to you.
Your bankruptcy assets are those you owned on the day your bankruptcy was filed. So, for example, if your case was filed on October 1st, as of that day you were entitled to about 9/12ths of your upcoming tax refund. So, 9/12ths or 75% of your refund is an “asset of your bankruptcy estate" and the other 25% you earned after the bankruptcy was filed is yours.
Depending on other assets you had at the time you filed, your attorney may have been able to protect more than just your portion of the refund. Portions that are based on Earned Income Credit are also exempt.
The trustee in your case will use the information provided in your schedules and the exemptions you claimed to determine how much, if any, of your tax refunds to return to you. It is best to assume that you will lose all of your tax refund for the year your bankruptcy is filed. Then, if you get to keep part of the refund, it can be a bonus.
What happens if I just keep the money and refuse to turn it over or I spend it?
If you keep money or other property that belongs to your bankruptcy estate, you are committing bankruptcy fraud. The Trustee will ask the court to withhold or take away your bankruptcy discharge and you will never be able to discharge the listed debts through any bankruptcy. Additionally, you would still owe the Trustee the money and he can sue you for it and garnish it from your wages.
What if I really need the money for unexpected expenses?
Unfortunately, the Trustees are not able to take your need for the money into consideration when determining how much belongs to you. They can only use math to determine how much belongs to you and how much belongs to your creditors. The Trustee’s job is to do whatever is best for your creditors. They would not be doing their job if they allowed you to keep more of your refund in an effort to help you out. This is one of the things to consider when deciding to file bankruptcy and deciding when to file. Keep in mind the amount of debt you are discharging. One tax refund is a small price to pay to be rid of all that debt.