If you are thinking about filing a Chapter 7 bankruptcy in Ohio and anticipate receiving or have received income tax refunds, you might have to give up a portion of those tax refunds. The amount of your refund that is protected is determined by when you file, when you receive your refund, and whether your refunds are subject to laws that might protect them (called bankruptcy exemption laws). In Ohio, you can use the cash and wildcard exemption so to protect your tax refund, and you can protect any portion of your refund that is attributable to the Earned Income Tax Credit and Additional Child Tax Credit.
(To learn more about filing for bankruptcy in Ohio, see Ohio Bankruptcy Information.)
How Tax Refunds Are Treated in Chapter 7 Bankruptcy
When you file a Chapter 7 bankruptcy in Ohio, the following income tax refunds are part of your bankruptcy estate:
- income tax refunds that you received before filing for bankruptcy, and
- income tax refunds that are due to you for the portion of the tax year that passed before you filed for bankruptcy.
If your tax refund is part of your bankruptcy estate, the bankruptcy trustee may be able to take it to repay your unsecured creditors (unless you can exempt all or a portion of the refund, discussed below). For more information, read Nolo’s article Can I Keep My Tax Refund in Chapter 7 Bankruptcy?
Example. You filed for Chapter 7 bankruptcy on October 1, 2012. You received your 2012 income tax refunds in the total amount of $4,000 in February, 2013. The portion of your 2012 tax refunds to which you were entitled on October 1, 2012 is the property of your bankruptcy estate, meaning your trustee may ask you to provide your tax returns when you file them, and take the unprotected portion when you receive the refunds. However, the trustee must prorate that amount he or she can take according to the date of your bankruptcy filing. October 1, 2012 is the 274th day of the year, so your trustee would divide $4,000 by 365 days and multiply the result by 274 days. $3,002.74 is the prorated amount of your refunds that is property of your bankruptcy estate.
Using Ohio Exemptions to Protect Your Tax Refund
Even if your refund is part of the bankruptcy estate, you may be able to use Ohio state bankruptcy exemptions to protection all or a portion of your refund.
Bankruptcy exemptions are federal or state laws that protect your property when you file a bankruptcy. If you file a bankruptcy in Ohio, you must use the Ohio state exemptions. Below are the specific Ohio bankruptcy exemptions that you may be able to use to protect your tax refunds
(To learn more about bankruptcy exemptions, how they work, and which ones you can use, see our Bankruptcy Exemptions topic area.)
Ohio Cash and Wildcard Exemptions
In Ohio you can exempt up to $450 of cash or tax refunds (O.R.C. 2329.66(A)(3)). Ohio law also provides a wildcard exemption (an exemption that can be used for any type of personal property.) You may use the wildcard exemption to protect up to $1,225 of your tax refund. (O.R.C. 2329.66(A)(18).
(To learn how wildcard exemptions work, see The Wildcard Exemption in Bankruptcy.)
Ohio Exemption for the Earned Income Tax Credit
In Ohio, you can protect the portion of your tax refund that is attributable to the Earned Income Tax Credit (EITC). (O.R.C. 2329.66(A)(9)(g)).
Example. You received income tax refunds in the amount of $6,500, and $5,000 of those refunds was attributable to Earned Income Tax Credit. You had no cash on hand or on deposit when your bankruptcy was filed. You can use Ohio’s $350 cash exemption and $1,225 wildcard exemption to protect the part of your refund not due to the EITC. And you can protect the portion of your tax refund attributable to the EITC by using Ohio’s EITC exemption.
Ohio Exemption for the Additional Child Tax Credit
In Ohio, you can protect the portion of your tax refund that is attributable to the Additional Child Tax Credit. (O.R.C. 2329.66(A)(9)(g)).
The Additional Child Tax Credit a refundable tax credit for people who have a qualifying child and did not receive the full amount of the Child Tax Credit. Refunds due to the Child Tax Credit that are not part of an Additional Child Tax Credit are not exempt in Ohio.
Don’t Mix Tax Refunds With Other Money
If you commingle your tax refunds with other funds by depositing your refunds into an account that holds other money, such as wages or pension funds, you risk losing some of the exemptions that normally protect tax refunds in Ohio. This is because in order to claim an exemption for a tax refund, the bank account funds must be traceable to the refund.
Your trustee could argue that, once your refunds touch other money, you can no longer prove which dollars came from the Earned Income Tax Credit or the Additional Child Tax Credit, and therefore you cannot use those exemptions. Your best bet is to receive your refund by paper check and either hold onto it or deposit it into an account with no other funds.