Can the Chapter 7 bankruptcy trustee take my tax refund?

It's likely that the bankruptcy trustee will take your tax refund. Here's why.

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It is very likely that the Chapter 7 trustee will take your tax refund if you file for bankruptcy.

When you file for Chapter 7, anything that is or becomes due to you from dates or time periods prior to the date you file for bankruptcy is considered property of the bankruptcy estate. It is the trustee’s job to collect all of the nonexempt money and property that is part of your bankruptcy estate and use that to pay creditors. Your prior year's tax refund is included in that property even if you don’t file your return until after you file for bankruptcy. (To learn more how this works, see our Chapter 7 Bankruptcy and Bankruptcy Exemptions areas.)

The only way you can stop the trustee from taking your refund is to claim it as exempt. You can do this only if an exemption that will cover the tax refund is available to you. It is rare to find an exemption specifically for tax refunds. You will probably need to use a wildcard exemption (one that you can apply to anything, within monetary limits).

How the Trustee Gets Your Tax Refund

How the trustee obtains your tax refund may vary depending on where you live.

In many cases, the trustee fills out a form to notify the Internal Revenue Service that you have filed for bankruptcy and that any refund due is property of the bankruptcy estate. The Internal Revenue Service then sends the refund directly to the trustee.

If the refund is sent directly to you, if you have not claimed the refund as exempt, you must give the check or money to the trustee when you receive it. The trustee can deposit a check into the account that is created for the money collected in your case even if the check is made payable to you directly -- so you don’t need to cash the check or endorse it before forwarding it the trustee.

To learn more about the role of the trustee in your bankruptcy case, see our Bankruptcy Trustee area.

by: , Attorney

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