Written by Craig D. Robins, Esq.
This post is part of a series of articles this week addressing every aspect you will need to know about filing bankruptcy, protecting tax refunds, and related issues. Links to all posts in this series are at the bottom of the page.
Trustees Look Very Closely at Potential Tax Refunds at This Time of Year
The first four months of the year leading up to April 15th is tax season, and trustees will spend extra time and attention looking at the possibility of tax refunds to determine if they should be turned over. They also will continue to do so for a number of weeks thereafter.
Most people will not file their 2009 tax return until after mid-February. Thus, if your meeting of creditors is quickly coming up, you probably have not yet done your tax return. Many trustees will hold your case open until you do file last year’s tax return.
However, if your tax refunds in prior years were relatively small, and it appears that your tax refund for last year will also be small, then the trustee will likely close your case.
On the other hand, if you own your home and are claiming the homestead exemption, then any tax refund you receive will not be protected. In such situations, the Chapter 7 trustee will definitely want to hold your case open to see if you have any significant tax refund.
If you already filed your tax return and it shows that you will be receiving a large tax refund, and if the amount of the refund combined with your other liquid assets greatly exceeds the exemption amount ($2,500 per person), then the trustee will likely direct you to turn over your refund so that he can distribute it to your creditors.
If the trustee wants to keep your case open until you provide him with a copy of the bankruptcy petition, he will probably want your attorney to sign a stipulation which gives the trustee additional time to object to your case if you fail to comply or cooperate.
TIP: It is always best, if you are planning to file for bankruptcy, or if you have recently filed for bankruptcy, to file your tax return as soon as possible. That way, your bankruptcy attorney can review it and determine the best strategy for going forward with your case. In addition, you can minimize the amount of time the trustee will keep your bankruptcy case open for.
Suppose Your Tax Refund is Large and Non-Exempt, But You Filed Your Bankruptcy Petition Last Year
If the trustee appears entitled to the refund because it is not exempt, but you filed the return last year, the trustee should not take the entire refund. In such cases, the trustee is not entitled to any part of the refund that you earned after the date you filed the bankruptcy petition.
The Chapter 7 trustee will thus take a pro-rata portion of the refund based on the percentage of the year that has already passed at the time the petition was filed.
TIP: If you expect a large tax refund, you can minimize the possibility of having to turn this over to a trustee if you revise your withholding exemptions, so that less tax is withheld. Although it may be too late for some consumers to take advantage of this, those who read this post in the future can avail themselves of this tip. Speaking with an accountant about this is always best.
Quick Links to All Tax Week Blog Posts About Tax Refunds and Bankruptcy:
Thursday: How a Tax Refund Can Mess Up Your Bankruptcy Means Test 
Friday: Tax Refunds in Chapter 13 Bankruptcy Cases 
Informative Article About Eliminating Taxes in Bankruptcy:
Article About Tax Consequences and Bankruptcy: