Will I lose my income tax refund if I file Chapter 7 bankruptcy in Oklahoma?

by Dan Nunley

As April 15 draws closer, I am getting quite a few phone calls and emails from people who are considering filing Chapter 7 bankruptcy but are worried that they may lose their income tax refund if they do.

Most of these people are depending on their income tax refund for necessary living expenses or are planning to use it to catch up on mortgage payments or car payments. Some are even wanting to use their income tax refund to pay their bankruptcy attorney’s fees and filing fees.

The answer to this question depends on the specific facts of your situation and where you file your case. The exemption laws that are available to protect an income tax refund vary dramatically from state to state.

Like everything else in bankruptcy, it is very important that you be completely open and honest with your bankruptcy lawyer about your income tax refund. I ask every client of mine whether or not they have filed their tax return and whether or not they have already received or are expecting an income tax refund.

In Oklahoma, if you file your bankruptcy case AFTER you get your income tax refund, and you spent your refund on exempt property, then your worries are over. It’s not an issue.

It would be all right to spend the tax refund on things such as food, clothing, household goods, home and vehicle repairs, catching up on your house payments, and contributing to retirement accounts.

But you could spend your tax refund in such a way as to create a problem.

For example, if you used the tax refund to repay a relative money you owed them, or to pay off one of your credit cards, that’s considered a “preferential transfer” where one creditor was treated more favorable than the others. And when that happens, the Chapter 7 trustee can force your relative or the credit card company turn over that money.

However, if you file your bankruptcy case BEFORE you get your income tax refund, you must disclose the tax refund in your bankruptcy documents as an asset.

And in Oklahoma, except for any portion of the tax refund that is attributable to the earned income credit, the tax refund is a non-exempt asset which means that it can be taken by the Chapter 7 trustee to be paid to your unsecured creditors.

Whether or not the Chapter 7 trustee will take an income tax refund usually depends on two things: 1) how large the refund is, and 2) what percentage of your unsecured debts would be paid by the refund. If the total amount is small and the percentage paid back would be insignificant, the trustee is likely to abandon the tax refund and allow you to keep it.

If you filed a joint tax return with your spouse, but only one of you filed bankruptcy, your tax refund will be prorated according to the ratios of you and your spouse’s incomes and the trustee would only be able to take the refund belong to the spouse who has filed bankruptcy.

If you file your bankruptcy after January 1, but before you received your refund, the Chapter 7 trustee can take your share of the entire refund.

If you file your bankruptcy petition before January 1, the Chapter 7 trustee may take a pro-rata portion of the refund attributable to the months before you filed your bankruptcy case.

For example, if you file bankruptcy on September 30, nine months of the year (January – September) is considered pre-petition (before the bankruptcy case is filed) and three months of the year (October – December) is considered post-petition (after the bankruptcy case is filed). In this example, the Trustee can take 75% of your refund, while you get to keep the other 25%.

Lastly, future tax refunds beyond the year in which you file your bankruptcy petition are not subject to being taken by the Chapter 7 trustee.

If you are considering filing bankruptcy but are worried about losing your income tax refund, contact me today to schedule a FREE initial consultation. Just fill out the Contact Dan form on the far right side of the page and click the Submit button and I’ll get back with you as quickly as I can. Or just pick up the phone and give me a call at 918-615-8260. I’ll answer all of your questions in plain English so that you’ll have the information you need to make the decisions that will help you the most.

{ 1 trackback }

What You Should Know about Tax Refunds and Bankruptcy | AllmandLaw
February 14, 2014 at 1:12 pm

{ 64 comments… read them below or add one }

Dan Nunley March 5, 2011 at 9:43 am

Amber,

Since you are represented by an attorney, I don’t think that it would be appropriate for me to give you legal advice. I would suggest that you do whatever is necessary to get your attorney’s attention so that he or she will answer your questions. The speed with which a Chapter 7 trustee makes a decision on administering an income tax refund will depend upon the specifics of the debtor’s case and the trustee’s case load. Most of the trustees with whom I work make a decision fairly quickly upon reviewing a debtor’s tax return, usually within a couple of weeks.

Dan Nunley

John March 10, 2011 at 3:00 pm

I am preparing to move from Florida to Oklahoma. I have been told by an attorney here in Florida that specializes in bankruptcy that I must wait 91 days to file after moving to Oklahoma, and 180 days by an attorney referred to me in Oklahoma who I don’t think specializes in bankruptcy.

Also, I have been told contradictory things about whether or not I actually *must* appear for the hearing. One attorney required it, but another said I could appear by phone. My new job said that leave for new employees is very, very restricted.

I barely did not pass means test in Florida. But since I am moving to Oklahoma and having to accepting a several thousand dollar per year in salary, I should pass easily

My questions are:
a) How long must I be a resident in Oklahoma to file for Chapter 7?
and
b) If I pass the means test for Chapter 7 once resident in Oklahoma, must I appear at the hearing required or may I “attend” by telephone?

Thank you.

John

Dan Nunley March 24, 2011 at 9:08 am

John,

1. Venue is proper in the jurisdiction where you have lived the greater part of the 180 days immediately preceding the date your bankruptcy petition is filed. So if you’ve only lived in Florida and Oklahoma during the 6 months preceding your bankruptcy filing, once you’ve been in Oklahoma for 91 days, you’re good to file here. See my blog post on this subject: http://www.oklahoma-bankruptcy-attorney.com/bankruptcy-basics/how-long-must-i-live-in-oklahoma-before-i-can-file-bankruptcy-there/

2. Your physical presence is required at the First Meeting of Creditors (341 Meeting) unless excused by the court. Generally the court will reschedule the meeting if there is a conflict. The court may approve a telephonic appearance in cases of serious illness, hospitalization, incapacity, and military deployment. I doubt that the court would approve a telephonic appearance in the situation you have described.

Dan Nunley

Steven Hager March 25, 2011 at 12:52 pm

Dan, these Q&A’s about tax refunds are excellent.

One question that comes to my mind is why people don’t increase their exemptions via a W-4 when they are filing for BK later in the year. With a little bit a calculating they should be able to reduce their “refund” to virtually zero or even owe a little.

It does not make sense that they would “overpay” during the year just to have it taken away by the trustee. Given that the W-2 does not break out each pay period it seems it would be very onerous on a trustee to calculate what the refund would have been before the change in exemptions, if even aware of the change.

Nadine January 26, 2012 at 7:41 am

I filed bankruptcy in December and I go to court on January 30th. I filed taxes yesterday. If I reschedule my court hearing, can my lawyer still take my taxes just by filing?

Dan Nunley January 27, 2012 at 2:19 pm

Nadine,

Bankruptcy rules and procedure vary from state to state and you haven’t told me where you live and where you filed your bankruptcy case. Therefore, I would suggest that you contact a knowledgeable, experienced attorney near you for advice regarding your specific situation. Your state law may allow you to protect or exempt some or all of your income tax refund. However, if your state law doesn’t allow you to exempt your tax refund, then you would generally want to wait to file bankruptcy until after you received and spent your income tax refund. Otherwise, the bankruptcy trustee will be able to take your refund when it arrives. Rescheduling the 341 Meeting/First Meeting of Creditors would not change that fact.

Dan Nunley

Dianne January 28, 2012 at 1:26 pm

Filed in Florida, April 2011, Discharged in Oct. 2011..no mention from anyone that my taxes would be taken…2010 taxes had come and was spent on the bankruptcy attorney …2011 isn’t here because I have not filed my taxes for the year…so my question is, would they use April or Oct. to figure the percentage and would I know by now if they plan to take my taxes?

Ruth January 30, 2012 at 7:42 pm

Hi, I am in the process of filing Bankruptcy chapter 7. I live in Minneosta. I want to file for my takes before filing Bankruptcy. Will they still require me to pay back what I get in refund after I file the case?

Dan Nunley January 31, 2012 at 10:19 am

Ruth,

If you receive and spend your income tax refund before you file bankruptcy, then your refund is no longer an asset that needs to be disclosed in your bankruptcy schedules and is not subject to possible liquidation by a bankruptcy trustee.

Dan Nunley

Dan Nunley January 31, 2012 at 10:22 am

Dianne,

Your Chapter 7 Trustee would be entitled to turn over of that portion of your income tax refund attributable to the calendar year preceding the date you filed your case. I would suggest that you check to see if your Chapter 7 Trustee filed a Report of No Distribution after your 341 Meeting/First Meeting of Creditors. If so, that indicates that your Trustee will not be seeking turnover of any 2011 income tax refund. If a Final Decree has been issued and your case closed, then it’s too late for the Trustee to change his or her mind and go after your tax refund.

Dan Nunley

Bob February 19, 2012 at 10:58 am

Dear Mr. Nunley,
Unfortunately, I was divorced after 22 years in 2012. Our Chapter 7 bankruptcy was final in January of 2012 and our debts discharged (it was filed in October, 2012) and my ex-wife and I have recieved the final discharge. I filed my income tax for 2011 after the final discharge was granted as head of household with one child and qualified for earned income credit and child credit as well. I do not make much money and need the income tax refund for essential bills and living expenses (rent, gas, utilities). I have received a note from the bankruptcy attorney stating the I must turn over any refund I recieve to the bankruptcy trustee. Does that include the earned income and child credit as well for state and federal?

Thank,
Bob

Dan Nunley March 29, 2012 at 3:40 pm

Bob:

Oklahoma exemption statutes allow you to protect only that portion of an income tax refund that is due to the earned income credit. If you need further advice, I would suggest that you contact your bankruptcy attorney. I wish you well.

Dan Nunley

Karen Williams April 19, 2012 at 7:26 pm

I just wanted to ask some questions. I already filed for Chapter 7 but i wanted to know why do i have to turn over my 2011 income tax refunds? I thought i would be able to keep them for next year .. and what is the point of doing Chapter 7 if they will take it to pay off the unsecured debt?

Dan Nunley April 20, 2012 at 12:22 pm

Karen:

A good bankruptcy attorney would have informed you that if you filed your bankruptcy case before you received and spent your income tax refund, the Chapter 7 trustee could take your refund away from you. The purpose of Chapter 7 bankruptcy is to get a fresh start, but there are specific laws regarding what property you get to keep and what property you lose. Poor timing and unwise decisions can be costly in bankruptcy. I wish you well.

Dan Nunley

Leave a Comment