Quick Question about Tax Refund and Chapter 7

[MuchTooMuch]

I filed Chapter 7 BK in January, and was just discharged in early June. My husband did not file. We just received our joint/married tax refund. I informed my attorney that we had the money, but he has not responded yet to whether he thinks we can keep it or not. Is it typical that the Trustee will ask for all of the refund, even though my husband is not in the BK? Has this happened to anyone else? Would you please let me know what happened? Thanks in advance!

[justbroke]

You should already know whether it was exempted. You might be able to look at your Schedule C (Exempt Property) in your petition package. It may say something like "Anticipated 2011 Tax Refund" and an amount.

If it was exempted, then it is yours. If not, then part of it may be property of the Estate. Do you remember whether you are an "Asset" case or "No Asset" case?

Typically, if the refund is not exempt, then the Trustee would only take the filing spouse's (that is the debtor spouse) "portion" of the refund. In some cases, Trustees have argued that a spouse that doesn't work isn't "entitled" or has any of the refund attributable to them... but that's another story for another time.

[MuchTooMuch]

I have looked through my paperwork, and don't see anything about the refund. We actually ended up owing federal taxes, but got a state refund of roughly $1,100. My attorney told me a while ago that I would need to disclose any refunds to the Trustee so he will probably take at least a portion of it.

I received a Standard Discharge from the Judge in early June, but my Trustee just filed a notice that he is investigating assets to recover money to pay my creditors. My attorney prepared me for this...that he used up my exemptions and will need to find a way for me to transfer my interest in a piece of property to the Trustee. He also warned me that this process could take a year or two before my case is closed. I am prepared for that, but in the meantime, we sure could use the tax refund to pay for some work that my husband needs on his truck. I am assuming that whatever happens, I will receive something in writing from either my attorney or the Trustee letting me know.

[justbroke]

Well, there you go. Your case is an asset case. You are probably not entitled to most or all of your tax refund.

You really need to work with your attorney on this. If the Trustee thinks there are assets, it may have been that they were waiting on the tax returns. However, since your State underpayment "might" consume a chunk of your Federal "overpayment", your attorney may be able to convince the Trustee that it was a wash or near a wash.

Since your attorney has all your financial data and is aware of the details, they will likely contact the Trustee with either the position of turning over the entire refund or a portion. I can't answer that question for you.

[MuchTooMuch]

Thanks, justbroke. He received all my information and said he would let me know what the Trustee decides to do. I thought this might be a somewhat common occurrence and wanted to see what others had gone through. I'll keep my fingers crossed.

[justbroke]

This is common for people who file near tax time. Some Trustees are more aggressive nad will even try to get a piece of the tax refund even if it's only July of a particular year, but many Trustees attempt to claw at tax refunds the later in the year it is. This is especially true when it comes to January and February (and maybe even March).

It's "easy" money for the Trustees. By "easy" money, I mean that they don't need to do anything to liquidate the asset. It's not like a car or trailer or home.