Springtime is here and love is in the air!  It is the time for the birds and the bees to sing loud.  It is also the time when bankruptcy trustees express their love for tax refunds due to debtors in bankruptcy cases.

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As a San Francisco Bankruptcy Attorney, my job is to protect assets when filing a case by claiming exemptions.  One asset that is sometimes overlooked by a debtor is the right to receive a tax refund.  This is particularly so in the early part of the year before tax time.  A right to receive a tax refund is a type of property right like all others.  Such property rights become property of the “bankruptcy estate” upon the filing of the case.  While not “cash in hand”, it is still a cash resource that will be due to the debtor.  Such property needs to be protected by available exemptions.

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If a debtor cannot assert an exemption in a tax refund, the trustee will often take possession of the refund for the benefit of creditors in a bankruptcy case.  Most clients that are able to use California’s “wildcard” exemptions have plenty of room to spare and are able to amend their bankruptcy papers to protect the refund. But there are some clients that have used up all of their wildcard or they are not eligible for the wildcard exemption in the first place. 

 

Then swoops in the Trustee!

 

A debtor can usually time the date of filing to maximally protect a refund.  If the refund can be exempted or is expected to be inconsequential, then filing NOW will often make no difference.  But if the refund is large, then the debtor might have wished that he or she timed the case to protect it.  Sometimes this simply means to fund an IRA with cash in the bank and protect that fund under the special exemptions accorded retirement funds, leaving more money available for use under the wildcard exemption. Other times, it may mean simply to wait to file the case after rent payments have cleared or other funds have been further spent down in the ordinary course. One thing we don’t want to do is never take it into consideration the refund in the first instance!

 

If you want help preserving and protecting your tax refund, call a knowledgeable San Francisco Bankruptcy Attorney. 

 

By: Marty Courson