Not sure how to handle potential tax refund...

[Krys]

We are filing CH. 7, and literally own virtually nothing other than personal belongings (furniture, etc.). No car, no home, nothing of real value. It was a really tough couple of years.

We will be entitled to a relatively substantial tax refund ($4000 or so). $1400 of that will go to pay taxes that we owe to the IRS.

I have defaulted on a student loan, and our credit report states that it has been paid/ is being paid by insurance (which I understand means that I owe someone other than the Loan co.). I'm assuming that they may be able to claim that from my tax refund.

I'm not really sure how to handle these two circumstances.

First, I know I have to list my student loan debt, but since it has defaulted, do I have to do anything differently when listing that?

Second, should I file my taxes now and let the money go where it will? Or should I wait until after I've filed for bankruptcy to file the taxes? Or is there another route to take that I'm not aware of?

Apologies if this is an obvious question....just want to make sure I cover all my bases.

[justbroke]

You can't file bankruptcy and then wait to file your taxes. Bankruptcy makes it compulsory to file all taxes that are due, in order to receive a discharge. Additionally, any anticipated refund may be property of the Bankruptcy Estate.

[marie]

You can opt to defer your refund- Below is from My attorneys website/blog

A Chapter 7 bankruptcy debtor’s tax refund is non-exempt and is part of the bankruptcy estate. Except that a Florida bankruptcy attorney told me about a case in another district where the bankruptcy debtor may have beaten ths system. The debtor filed his federal income tax return as he was preparing for Chapter 7 bankruptcy. He realized he would be eligible for a significant tax refund which would be lost to the trustee. So, when the debtor filed the tax return he check the box authorizing the IRS to apply the tax refund to future year’s tax liability. When he filed bankruptcy, the trustee demanded the tax refund. The debtor replied that he was expecting no refund. The issue went to court and was appealed all the way to the circuit court of appeals.

The appellate court ruled for the debtor. The court said the debtor had no right or ability to claim and turnover the tax refund because under the Internal Revenue Code the debtor/taxpayer’s election to defer the refund is irrevocable. Because the debtor had no right under the tax law to reverse his election and get the tax refund, so the trustee had no right to seek its turnover.

If you plan to file Chapter 7 bankruptcy before you file your 2010 tax return, and you are entitled to a significant refund, you should tell the IRS not to send the refund and apply the amount to your future taxes. The trustee will not be pleased, but there is legal authority to back up your position. Graves No. 08-1462 10th Cir.

[HHM]

You can opt to defer your refund- Below is from My attorneys website/blog

A Chapter 7 bankruptcy debtor’s tax refund is non-exempt and is part of the bankruptcy estate. Except that a Florida bankruptcy attorney told me about a case in another district where the bankruptcy debtor may have beaten ths system. The debtor filed his federal income tax return as he was preparing for Chapter 7 bankruptcy. He realized he would be eligible for a significant tax refund which would be lost to the trustee. So, when the debtor filed the tax return he check the box authorizing the IRS to apply the tax refund to future year’s tax liability. When he filed bankruptcy, the trustee demanded the tax refund. The debtor replied that he was expecting no refund. The issue went to court and was appealed all the way to the circuit court of appeals.

The appellate court ruled for the debtor. The court said the debtor had no right or ability to claim and turnover the tax refund because under the Internal Revenue Code the debtor/taxpayer’s election to defer the refund is irrevocable. Because the debtor had no right under the tax law to reverse his election and get the tax refund, so the trustee had no right to seek its turnover, from the IRS

If you plan to file Chapter 7 bankruptcy before you file your 2010 tax return, and you are entitled to a significant refund, you should tell the IRS not to send the refund and apply the amount to your future taxes. The trustee will not be pleased, but there is legal authority to back up your position. Graves No. 08-1462 10th Cir.

Let's back the truck up on this one, I know this case (I also know the attorney who's clients this was subject to). This DOES NOT WORK in the normal, run of the mill tax refund scenario. As with most legal cases that have an interesting, off beat ruling, like this one, the bare "ruling" is not very helpful unless you understand the background facts. Graves was self employed and designated the refund to off set future estimated payments. However, a tax payer is not out of the woods.

Here is the rub

"The portion of that further refund attributable to pre-petition earnings would become property of the estate. Thus, we hold that the estate's interest in the pre-payment is limited to debtors' contingent reversionary interest in the pre-payment attributable to pre-petition earnings. See In re Middendorf, 381 B.R. 774, 778-80 (Bankr.D.Kan. <http://scholar.google.com/scholar_case?case=13265446656644141480&q=%2...> 1157*1157 2008)<http://scholar.google.com/scholar_case?case=13265446656644141480&q=%2...> ("The debtors' interest in a pre-petition tax overpayment is a contingent reversionary interest pending the final determination of the debtors' tax liability. Once the ultimate tax liability is assessed and satisfied, the debtors' interest vests in the resulting refund attributable to pre-petition funds."); cf. Redmond v. Lentz & Clark, P.A. (In re Wagers), 514 F.3d 1021, 1029 (10th Cir.2007) (recognizing that "even a contingent, reversionary interest is included in a debtor's estate under § 541").[1]<http://scholar.google.com/scholar_ca...816388527&q=%2...[2]>"

An enterprising trustee may say, "screw you", I will just keep the case open until NEXT YEARS tax return is filed and the tax liability is determined. Also, you may have good faith issues if the debtors start adjusting withholding to make sure no future refund would accrue. Anyway, something to think about.
http://scholar.google.com/scholar_ca...816388527&q=%2...

Understand, what the case said was that the Trustee cannot "compel" the IRS to turnover the refund if the debtor has designated for future taxes. The trustee already has a work around, (1) keep the case open to the following year and grab the refund then force you to only claim a normal withholding amount. (2) There needs to be some sort of tax certain to be owed.

If you want to get technical, the trustee still has the right to the revisionary interest created by such a tax refund designation. Nice try, but this is a very specific ruling designed to a limited set of circumstances. It is not a "beat" the system ploy.

[Krys]

Thanks for the responses!

After doing some digging, it almost seems that another option would be to simply "exempt" my tax refund. It seems that it would fall well within my allowed exemptions (I have nothing claimed for the wildcard). Am I incorrect about this?

[justbroke]

Yes, that's what I got from Graves as well. Besides, it was 10th Circuit and non-binding on the rest of us, and was fact specific. The Trustee still had an arsenal of weaponry to go after the Debtor.

I think the key in Graves is this...

In summary, we hold that the pre-petition portion of the refund is property of the estate. We go further, however, to hold that only the part of the refund that (1) is attributable to pre-petition earnings and (2) reverted to debtors after application of the refund to their ultimate (2007) tax liability, is subject to turnover.

The question in Graves was only whether the Trustee had the reach to force the IRS to turn it over on demand.