It is the time of year when people are scrambling to get their taxes filed or possibly waiting on a big tax refund. If a potential debtor is thinking about this, then a Chapter 7 or Chapter 13 Trustee will also likely be thinking about it since these refunds can be part of a debtor’s bankruptcy estate. That does not mean this money cannot be protected, enabling debtors to retain a portion or even all of their money. I realize tax refunds can often be for quite a bit of money and families rely on that money to get caught up with bills or buy things that are needed for their house. That is why it is very important that you know the ramifications of receiving a tax refund if you are considering filing for bankruptcy.
As a bankruptcy attorney, it is my job to protect the assets of my clients. In the initial consultation I always ask if you are expecting a tax refund and for how much. It is important for an attorney to know this because we only have a certain amount of exemptions to use in each case to protect this money. An exemption is something an attorney can use to protect an asset in your bankruptcy case. In both a Chapter 7 and Chapter 13 case an attorney has a wild card exemption and possibly a head of household exemption. The law also gives you $350 to protect for each child you have that is under 21 years old. These exemptions are important and knowing how to use them and apply them to your case is even more important. You might have noticed something before on your taxes called an Earned Income credit. You may have also noticed something called an Additional Child Tax Credit. If you file your taxes before your bankruptcy is filed the Earned Income Credit that shows up on your IRS 1040 form will be money that is protected from your bankruptcy Trustee. If you are in a Chapter 13 bankruptcy, both the Earned Income Credit you receive and the Additional Child Tax Credit will be exempted (or protected) from the Trustee and your estate.
Sometimes, potential clients come and see me and they are going to be getting back a very large refund, sometimes up to $8000 or more. The more money you are able to get back, the harder it is for me to be able to protect the entire amount. In a situation that I cannot protect all of it, I would possibly advise you to wait to file the bankruptcy until after it was received. It is important to know that you have options and I can help make this process easier and much less stressful. If you have questions about protecting your tax refund or any other questions related to bankruptcy, please give me a call at 636-352-2030 or visit our website at www.klinelawstl.com. We offer free consultations at 2 convenient locations in St. Charles and St. Louis County.