Will The Chicago Bankruptcy Trustee Take My Tax Refund?

Chicago Bankruptcy Trustee

In certain circumstances a Chicago bankruptcy trustee can take your tax refund. It all depends however on the facts of the case. Let’s start with the chapter 7 situation. If you receive your tax refund prior to your chapter 7 bankruptcy case being filed and you exhaust that refund prior to the 341 meeting of creditors, a chapter 7 trustee is typically not going to make an issue of it. This assumes that the tax refund was not $7,000 – $10,000. If however, you file your bankruptcy case and appear before the trustee and you have not yet received your tax refund, then the chapter 7 trustee is at a much greater likelihood of inquiring about the refund and demanding that it be turned over. It all comes down to the actual number or amount of the refund. In the state of Illinois, you are allowed a $4000 miscellaneous, wildcard exemption that can be applied to any type of personal property. Your tax refund or anticipated tax refund is personal property that can be protected by that exemption. So if your refund is excessive, the trustee can then demand that the non-exempt portion be turned over to him so that creditors of the bankruptcy estate can be paid.

 Chapter 13 Trustee

If we’re talking about chapter 13 bankruptcy, we have an entirely different process that we must adhere to. In the northern district of Illinois, there are three chapter 13 bankruptcy trustees assigned to cases. Each of the three trustees has a different demand or policy with regard to tax refunds. The first trustee will allow you to keep your entire refund free and clear for the entire duration of your chapter 13 bankruptcy case. That means that for the next 3 to 5 years or however long your case lasts, your tax refund will be yours to use for living expenses or whatever you see fit. The second trustee allows you to protect up to $1200 of your refund free and clear. This means that any amount over $1200 must be turned over to the trustee as an additional payment toward your debt. This amount is not applied towards your balance to reduce it. This amount is a supplemental payment which will provide a greater dividend to your unsecured creditors. The third trustee does not let you retain any portion of your tax refund while you are in a chapter 13 bankruptcy case. We do have the option to bring a motion to allow the debtor to maintain a tax refund provided we can convince the court that those funds are needed for repairs, ongoing medical bills, purchasing an auto or other emergencies that require the debtor to utilize the tax refund himself.

 Amend Your Allowances

Chapter 13 bankruptcy clients can make the best effort by changing their withholding allowances to ensure the smallest tax refund possible. I would much rather see my clients have more money in their pocket every pay period. They will have less money taken out and will not wind up having to turn over the tax refund to the chapter 13 trustee each year. My goal is to zealously represent my client. My client has a greater chance of success in his chapter 13 bankruptcy case if he is able to retain 100% of his tax refund every year. By allowing the federal government to withhold more taxes out of your paycheck each pay period, you’re actually hurting yourself on two different levels. First, you have less money in your pocket every day. Secondly, you’re going to be forced to turn over all or a portion of that tax refund depending upon which chapter 13 trustee is randomly assigned to your case.

 Chapter 7 Timing

In a chapter 7 bankruptcy case, if you anticipated a huge refund then the timing of your filing is very important. You want to make sure that you file your bankruptcy case after you have received a tax refund and exhausted those funds on living expenses. This is true typically if your tax refund is going to be relatively large above the protectable amount. When it comes to chapter 13, you must work with your withholding allowances as they are more important than the actual timing of the filing. For more information on tax refunds as they relate to a bankruptcy case, consider calling my office directly at 847-520-8100. You will learn that your tax refund is much more beneficial when it’s in your hands as opposed to the Chicago bankruptcy trustee.  This is true whether you are appearing in front of a chapter 7 bankruptcy trustee or a chapter 13 bankruptcy trustee.

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