WHAT DO I DO IF THE BANKRUPTCY TRUSTEE WANTS MY TAX REFUND?
It is very common for the Chapter 7 bankruptcy trustee to take your tax refund in Indianapolis, Indiana. Because there is only a very limited exemption to protect tax refunds in Indiana, one year of tax refunds are very commonly taken to pay back creditors. What do you need to do if your tax refund has been held as an asset by your Indianapolis, Indiana Trustee? Although it is important to follow the SPECIFIC instructions given by your attorney and trustee, let’s discuss the basic, routine procedure for turning over your tax refund.
GET YOUR TAX RETURN FIRST TO THE TRUSTEE: THE TRUSTEE MUST CALCULATE HOW MUCH CAN BE TAKEN
After your tax refund is held by your Indiana bankruptcy trustee as an asset, you must prepare to send the Trustee your tax return as soon as you can complete it. The bankruptcy trustee cannot make a calculation as to how much of your refund can be taken until he receives a copy of your tax return. Remember, certain parts of your tax refund may be protected from the Trustee such as earned income credit (EIC).
Your Indiana bankruptcy trustee will calculate how much will be taken by “pro-rating” the tax year. As an example, if you filed bankruptcy halfway through the last year, the trustee will only be able to take 1/2 of your tax refund. The rest will be refunded to you. A fraction of how far the year proceeded – such as possibly 262/365 days – will be calculated for however far into the year you filed. However, if you filed after the entirety of the tax year (such as in the beginning of January), you could lose the entirety of the previous year’s tax refund.
MAKE SURE THAT YOUR ENTIRE TAX REFUND CHECK IS DELIVERED TO THE TRUSTEE
Many times in Indianapolis, Indiana the bankruptcy trustee will “intercept” the tax refund check by filing an intercept request with the IRS. However, this is NOT always the case. Frequently, you will still receive your tax refund either by paper check or direct deposit. It is extremely important to not spend these funds: you must turn the entirety over to the trustee immediately (unless otherwise instructed by the trustee). You will have returned to you your portion (if any) of the tax refund usually within 60 to 120 days.
If you receive a paper check, you must send the check (both federal and state) to the trustee’s office unendorsed. If the funds have been deposited into your account, you may want to call your attorney. Your attorney may either instruct you to send the entirety of the funds to the trustee immediately or wait until the trustee makes his tax return calculation. Once again, this article is only to help familiarize the reader with proper turning over of their tax refund: follow the instructions of your attorney and trustee.
~Indianapolis Bankruptcy Attorney John F. Bymaster