Can I keep my tax return if I file for bankruptcy in Ohio?

This is a common question that is asked of an Ohio bankruptcy attorney and one to which there is no set answer that applies to all situations. On this page, we will look at how tax refunds are generally handled in Ohio bankruptcy cases.

Under the Bankruptcy Code, any money owed to a party filing a bankruptcy petition is considered an asset so long as the bankruptcy petitioner was entitled to payment prior to the filing of the bankruptcy petition itself. Tax refunds fall into this category because the money to be refunded was usually earned in the tax year prior to the year in which bankruptcy is filed.  It is wise to consult with an experience bankruptcy attorney, such as those at Zellar & Zellar, Attorneys at Law, Inc., who can assist with proper exemption planning to avoid the need for a tax refund turnover.

In Ohio, the eventual fate of your tax refund is largely determined by the type of bankruptcy petition that you file, a Chapter 7 or a Chapter 13.

Chapter 7:
In Ohio, tax refunds that are received prior to filing bankruptcy and any partial-year refunds that are due will be considered assets and thus subject to seizure by the bankruptcy trustee for use in payment of creditors.  It is often wise for a potential debtor to file their bankruptcy case AFTER a tax refund is received and spent.  Most people use their refunds for normal day-to-day expenses, such as rent or a mortgage payment, food, utilities, and medicine.  The Trustee is also entitled to any amounts over-paid in the year the bankruptcy case is filed.  There are certain exemptions that may apply to a given case that may be employed to protect at least some of a filer’s future tax refund. These exemptions include:

  • Cash Exemption
  • “Wildcard” Exemption
  • Earned Income Tax Credit Exemption
  • Additional Child Tax Credit Exemption

Of the above, the Cash and Wildcard exemptions are usually available to most filers while the Earned Income and Additional Child exemptions typically apply to low and middle income families.  If someone is entitled to receive funds attributable to the Earned Income Credit and Additional Child Tax Credit, those amounts are completely exempt from attachment by the Trustee.   The availability of these exemptions must be discussed with an experienced bankruptcy attorney.  If one is unsure what type of refund is to be received, contact the experienced attorneys at Zellar & Zellar, Attorneys at Law, Inc., to review the expected refund situation.

Chapter 13:
In a Chapter 13 Debt-reorganization Bankruptcy, all disposable income must be made available to the trustee for repayment of debt. Since the Bankruptcy Court considers any money owed to the Chapter 13 Bankruptcy petitioner to be an asset, tax refunds are usually subject to seizure by the trustee and thus unavailable to the bankruptcy petitioner.  In Southern District of Ohio – Columbus, there are two trustees, both of which have separate requirements as to the turnover of tax refunds.  There are also considerations made for those individuals who file a Chapter 13, but whose median income is below that of IRS guidelines.  To talk about one’s specific set of circumstances and whether or not a Chapter 13 Trustee will require the turnover of future tax refunds, it is best to consult with an experienced bankruptcy attorney who practices in the Columbus district, such as the attorneys at Zellar & Zellar, Attorneys at Law, Inc.

Summary:
In general, federal and state income tax refunds are considered assets by the Bankruptcy Court and can be seized by the Bankruptcy Trustee to pay the filing party’s creditors. There are circumstances in which the filing party may be able to keep at least some, or possibly all, of a tax refund. These circumstances include refunds of taxes that were paid after filing for bankruptcy and asset protection available through exemptions. In Chapter 7 Bankruptcy filed by residents of the State of Ohio, tax refunds and other cash assets may be protected by Ohio Cash and “Wildcard” exemptions as well as exemptions that may apply under the Earned Income and/or Additional Child Tax Credit programs.

Whether or not you may keep a federal and/or state income tax refund is a potentially complicated matter that must be discussed with an attorney having experience in both bankruptcy and taxation law matters.  Please call Zellar & Zellar, Attorneys at Law, Inc., today for a free consultation to discuss both Chapter 7 and Chapter 13 bankruptcy options.

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