The most conservative advice I can give you regarding protecting an income tax refund is to get your refund and spend it on reasonable and necessary expenses before you file bankruptcy. If you do that, the refund does not become an asset of the bankruptcy estate once you file and you cannot be forced to turnover the refund.

If you file bankruptcy before you get your refund, whether or not you will be able to keep a portion or all of the refund depends on several issues including most importantly what exemptions you will be using to determine whether your assets are exempt or non-exempt property. If you have lived in Oklahoma for 91 days, you can file bankruptcy here but you can’t use Oklahoma exemptions unless you have lived here two years. Oklahoma exemptions allow you to exempt only that portion of an income tax refund that is due to the earned income credit. Any refund not due to the earned income credit is subject to being taken by the Chapter 7 trustee. Whether the trustee takes the refund depends on the amount of the refund and the dividend that amount would pay to your unsecured creditors. However, if you moved to Oklahoma from Nevada less than two years ago, then you will have to use either Nevada or federal exemptions and their treatment of income tax refunds is different than Oklahoma exemptions.

I would suggest that you contact a knowledgeable bankruptcy attorney to discuss your specific situation and follow his/her advice. You may want to use the Attorney Finder provided by the National Association of Consumer Bankruptcy Attorneys. I wish you well.

Dan Nunley

I lost a house to foreclosure in Nevada ( we moved here to Oklahoma and bought a property using a HELOC, a 2nd loan on that property in Nevada), and also have other debts to various creditors. I was told (by an attorney) that I should file my 2009 income tax return and spend the refund before I file for bankruptcy for I am insolvent (unemployed). Is there a certain amount I need to come in under maybe to get a refund of $1,500.00 or less in order to spend it? Is it capped at a certain amount so the creditors get something from us filers?

Thank you sincerely,
Jim

You don’t say where you live, but as I am licensed to practice law only in Oklahoma, I cannot give advice to those who do not live in Oklahoma.

I will say that for clients of mine who are paying back taxes to the IRS through a confirmed Chapter 13 plan, the IRS is bound by the terms of the confirmed plan and is prohibited from intercepting future income tax refunds for purposes of set-off as you describe.

Dan Nunley

I filed Chapter 13 last March and it was confirmed in January of 2010. I owed back taxes of $900 and it was covered in my Chapter 13 filing, which is now part of my repayment plan. Will the IRS take the $900 from my tax return this year and send me a check for the difference? My anticipated tax return this year is $1400. Or, because the back taxes of $900 was included in the filing and is now part of the payment plan, will my refund be the original $1400?

I realize I have to remit my refund to my trustee, I just want to know for my own education.