Bankruptcy Exemptions and keeping your Tax Refunds when filing Bankruptcy
Bankruptcy Exemptions and keeping your Tax Refunds when filing Bankruptcy
When you file bankruptcy, you list all your assets; home, cars, cash on hand etc. You may also have a right to cash that you have not yet received such as accrued wages, a personal injury claim or tax refunds. All of these items must be scheduled on your bankruptcy petition. Chapter 7 is called “liquidation” because in theory, your property is sold to pay part of what you owe creditors. Sometimes new clients tell me they have heard you “lose everything” if you file Chapter 7 bankruptcy. But each state provides exemptions.
Congress and your state legislature wants you to be able to carry on with your life, so they provide exemptions for things like your home, cars, retirement etc. So you claim as exempt items that might otherwise be liquidated. There are federal exemptions and state exemptions. Each state determines when and if you can use federal exemptions, state exemptions or either one, although if you have not lived in your filing state long enough you may have to use exemptions from your prior state.
Early in the calendar year, you have earned relatively little wages. Late in the calendar year, you have acquired relatively high wages year to date. If like many wage earners you are having more wages withheld than necessary you will likely receive large tax refunds. This is cash you have not yet received but do have a right to so you need to claim and exempt it on your bankruptcy if you file later in the year. Since exemption schemes vary for each state you will want to talk to your attorney to see at what point in the year your tax refunds may become an issue.
Iowa provides a $1,000 exemption for your tax refunds, $2,000 for joint filings. Plus you get to keep all of your Earned Income Credit (EIC). The math can get a little challenging since you acquire a right to the full refund gradually. So if you file bankruptcy on Sept. 1st, 3/4 of the way through the year, you have earned a right to about 3/4 of your refunds for that year. So if you file a single bankruptcy on Sept. 1st and receive a $4,000 refund after you file your taxes early the next year, here in Iowa you could claim your $1,000 exemption. If your EIC is $2,000 and you don’t use any of your wild card exemption, in this case you would keep $3,000 and turn $1,000 over for your creditors.
So when you meet with your attorney to plan a bankruptcy filed late in the calendar year, or early in the following year before you have received and spent your refunds, be sure to discuss exemption with your attorney. Also, if you are waiting to file your bankruptcy after you receive refunds you should check with your attorney first to avoid preference payments. If for example you pay back family for past due debt the Judge can take that money back when you file bankruptcy.
Jeff Mathias practices consumer Chapter 7 Bankruptcy in Des Moines, Iowa.
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