Can a Trustee Take Your IRS Refund After Discharge From Bankruptcy in Nevada?

By Tom Streissguth

If your debts are out of control, you have the option of filing for personal bankruptcy. A bankruptcy trustee, appointed by a federal court, will take possession of your assets and sell them for the benefit of your creditors or enroll you in a three to five year debt repayment plan. At the end of the process, the court will discharge, or cancel, your debts. Some debts, including federal taxes, cannot be discharged in bankruptcy -- they must be paid in full. If the IRS owes you a refund, it might be subject to seizure by the trustee.

If your debts are out of control, you have the option of filing for personal bankruptcy. A bankruptcy trustee, appointed by a federal court, will take possession of your assets and sell them for the benefit of your creditors or enroll you in a three to five year debt repayment plan. At the end of the process, the court will discharge, or cancel, your debts. Some debts, including federal taxes, cannot be discharged in bankruptcy -- they must be paid in full. If the IRS owes you a refund, it might be subject to seizure by the trustee.

Tax Refunds and Bankruptcy

When you file for bankruptcy, you create a bankruptcy estate. This is all of your personal property that is available, by law, to settle your debts. When you file a petition for bankruptcy protection, you must list all of these "non-exempt" assets, including any tax refund you were due for the tax year in which you file. Those refunds are considered part of the bankruptcy estate; while the case is in progress, the bankruptcy trustee has the right to seize refunds when they arrive and use the funds to pay your creditors.

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Tax Refunds and Chapter 13

It's important to note that the trustee of any bankruptcy case has discretion to handle your assets as he sees fit. For example, the trustee may make an exception regarding tax refunds for those filing bankruptcy under Chapter 13. In a Chapter 13, you agree to a full or partial repayment of debts out of your income over a period of several years. Normally, the trustee will seize all tax refunds due over the course of a Chapter 13 repayment plan. If you agree to a full repayment of your creditors, however, the trustee can waive this provision and allow you to keep the refunds.

Wildcard Exemptions

Although your tax refund is non-exempt, in the state of Nevada, the law allows you to claim a "wildcard" exemption, with which you can keep a limited portion of your assets out of the bankruptcy estate. The wildcard is limited to cash or goods with a value of $1,000 for single filers and $2,000 for married couples. You can use the wildcard to keep your IRS refund out of the bankruptcy estate and off-limits to the bankruptcy trustee.

Earned Income Credit

Nevada and federal law also exempt any part of a federal tax refund that is due as a result of the earned income credit. The EIC is a feature of the federal tax code that allows individuals or couples earning a limited income to take a credit against taxes owed to the IRS. You must meet the IRS guidelines to claim the earned income credit.

Emergency Expenses

You might be able to exempt the refund if you use it for certain purposes. You must make a specific request to the trustee, and the expense must be for an urgent matter or an emergency, such as an unexpected hospital bill or the repair of your home or property after a storm. The general goal of bankruptcy law is to protect debtors from homelessness and destitution; if you can show that using your tax refund is needed for this purpose, you may be able to exempt it.

Refunds and Back Taxes

Recent overdue taxes are non-dischargeable; the three year "look back rule" states you can't get rid of IRS debt that is less than three years old in bankruptcy. So, even after the bankruptcy discharge, the IRS may use any refund due to you for repayment of back taxes.

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References

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Does My Tax Refund Have to Go to the Bankruptcy Trustee?

Many families view their annual income tax refund as a personal bonus or a means to fund an annual vacation or make a large purchase. If you are in personal bankruptcy proceedings, however, your tax refund may be taken by the bankruptcy trustee to pay your creditors. In some circumstances, all or a portion of your tax refund can be protected through careful planning and use of bankruptcy exemptions.

Kansas State Exemption on Keeping Federal Taxes While Filing Bankruptcy

When you file a Chapter 7 bankruptcy petition, all your assets become part of your bankruptcy estate and are subject to review and control by a court-appointed trustee unless the property is exempt under either Kansas state or federal law. Under federal and most state laws, you are not permitted to retain your tax refund while in bankruptcy as it is considered an asset to be forfeited to your creditors. In 2011, the Kansas Legislature enacted a special exemption which may allow you to keep much of your tax refund.

What Can Happen if I Don't Give My Income Tax Refund to the Trustee After Bankruptcy?

Once you file for bankruptcy, there are certain rules you must follow throughout the process. For example, you must disclose any and all assets to the bankruptcy trustee assigned to your case, including money received from a tax refund, even after you receive a bankruptcy discharge. If you fail to do so, the trustee may consider this an attempt to hide assets and revoke your discharge; this, in turn, would have the effect of restoring your debts and liability.

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