Each year many American’s count on their tax refund they receive from the IRS and State Taxation agencies to cover expenses like house repair, car repair, paying down credit card balances, summer school for children and last minute emergencies. Typically, an individual in Bankruptcy can have these tax returns forfeited to a bankruptcy trustee to pay of some of their debt. This seems really radical to some Debtors but there are a few factors that can help you determine if your tax returns are at risk. Please note, it depends what jurisdiction someone files in so you should contact a local Bankruptcy attorney in your area to find out more. This blog will focus on filing for Bankruptcy in the Southern and Eastern Districts of New York.

First a good bankruptcy practitioner will always look at the timing of a bankruptcy petition. If an individual is filing a chapter 7 Bankruptcy case and has already received a tax refund she is likely in the clear. As long as the funds can be exempted or have already been spent on reasonable necessities like rent, repairs or clothing then a trustee will most likely not look for a turnover of the tax refund. If a person is waiting on the refund in the mail then a trustee can hold the case open to try and take the refund and pay off your debts with it. Typically, a trustee will only look for such refunds around tax season in a chapter 7.

In a chapter 13 there are 2 approaches. Fist in the E.D.N.Y. (Eastern District of New York) covering Staten Island, Queens, Brooklyn and Nassau County the trustee is entitled to all tax refunds received by a debtor in Chapter 13. There are a few narrow exceptions to this rule but typically, each year you are in Chapter 13 in the E.D.N.Y. In the S.D.N.Y. (Southern District of New York) you get to keep $1,500 of your tax refunds. The remainder goes to the trustee with your regular monthly payments. So if you are entitled to $4,000 from your federal and state refunds you would keep $1,500 and send the trustee $3,500 if you live in the S.D.N.Y. This happens each year you are in Chapter 13.

Don’t worry, no matter what happens you will never pay back more than what you owed in Bankruptcy, typically my cases only pay about 5% to most creditors. My office also files several chapter 13 cases each year where Debtors do not forfeit any tax refunds to the chapter 13 trustee. If you are interested in learning more please contact my office at 212-244-2882. My firm only focuses on Bankruptcy law.