Tax Refunds and Bankruptcy

One of the big mistakes attorneys or people who file their own bankruptcy make are failing to list tax refunds that they are going to receive in the future in their bankruptcy petition. When a bankruptcy is filed you must list all of the property and property rights you have at present and what you expect to get in the future. With respect to tax refunds, if you file bankruptcy on December 31st, of any year you have earned 100% percent of your tax refund for that year even though you have not filed the tax return or received your refund check.

Failing to list the anticipated tax refund almost cost several debtors their discharges, and they lost any tax refund that was in excess of the amount reported, and exempted, in their bankruptcy petitions.

In the case of In re Turner, ,2011 Bankr. LEXIS 456 (Bankr. D. Vt. February 3, 2011) the Chapter 7 Trustee tried to disallow any claim of exemption of the tax refunds because the debtors (in the Trustee’s words) “…negligently or intentionally failed to disclose the tax refunds on their original petitions.”

Remember, you must list all of the property you possess, you must indicate what kind of property you do not possess, and you must anticipate the property that you are going to come to posses in the near future, list all of this property and apply the proper exemptions so you can keep the property.

In this case the Chapter 7 Trustee was able to collect any and all of the tax refunds that were not exempt. If these debtors had waited and filed the bankruptcy after they cashed the tax refund checks and converted the cash to exempt property, this issue would never have arisen.

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