A tax refund in considered to be an intangible asset just like cash, stocks, bonds, account deposits and receivables. As such it is entitled to protection along with all other intangible assets in the total amount of $400 for a single individual filer; $800 for a couple under Indiana law. (This figure changes from time to time.) Prior to filing, we will inquire as to your anticipated tax refund for the current tax year. The trustee may assert an interest in any earned, but yet unreceived tax refund which exceeds the allowed exemption. The Earned Income Credit (EIC) is not subject to claims of your creditors or the trustee; it is fully exempt. Child and other credits are not exempt. As your legal counsel we will evaluate your tax refund and advise you on the best strategy for preserving this and other assets should you file bankruptcy. Timing is usually key, so we will confer with you about the tax refund that you received in the previous tax year and inquire as to what, if any, changes have occurred with regard to your income and tax filing status in the current year. With this information we can estimate whether the anticipated refund would be placed in jeopardy in the case of a bankruptcy filing. In the instance of a Chapter 7 case it is common for the Trustee to simply request a share of the refund assuming that it is in excess of the exemption amount and is earned but not yet received. In Chapter 13 cases the Trustee will normally request that a portion of future refunds are pledged toward the plan during it’s’ life.
Often times our clients will have significant amounts withheld during the year so that they get the big tax check in the spring. This can help or hurt as it will show that there is not as much disposable income available throughout the year, but that tax check can become a target for the Trustee. It is usually best advised to only have the necessary tax withheld from your check and to simply be a good investor and to deposit those excess amounts (however small) into a savings account so that you, not the federal government, have control. If you are considering bankruptcy DO NOT make any sudden changes to your withholdings as this is a red flag to the Trustee. Consult with your attorney to determine the best course of action before making changes.