What About my Tax Refund?
Planning around a tax refund is sometimes the most important part of a tucson chapter 7 bankruptcy. Every time you receive a paycheck your employer withholds money that is sent to the government as payment of income taxes. Most employees overpay the government every year that is one reason they get a refund. That overpayment accumulates as the calendar year progresses and gets bigger with each paycheck you receive. It’s like having a savings account at the United States Treasury instead of at your local bank.
In Arizona, only $150 of cash is exempt from being attached by creditors for a single person, $300 for a married couple. So if you file tucson bankruptcy your tax refund is at risk of being seized by the trustee if it will provide a meaningful amount of money to your creditors.
How much is a meaningful amount of money is determined by the trustee on a case by case basis. For example, if you file chapter 7 bankruptcy on July 1st and you are due a $5000 tax refund for that year than you will lose $2500 of the refund to the trustee. Why $2500? Because you filed on July 1st so one-half of the year had passed and so one-half of your tax refund was deposited into your savings account at the United States Treasury, and $2500 is certainly a meaningful amount of money.
One way to avoid this result is to postpone your bankruptcy filing until after you receive your tax refund. But remember the exemption rule stated above still applies so you must spend the money on reasonable and necessary items prior to filing bankruptcy. What is reasonable and necessary? Things like delinquent taxes, repairs for your home or automobile, dental work, medical treatment, six months on food, your bankruptcy attorney’s fee, and so on.
Unfortunately, the same rules apply to any portion of your tax refund that is an earned income credit. What is an earned income credit? It is money that the government pays to low income families with children. If you qualify for an earned income credit than you may lose some of it to the bankruptcy trustee based upon the same rules stated above.