How Much of Your Tax Refund Do You Have to Give the Bankruptcy Trustee in Illinois?

By Tom Streissguth

Filing for bankruptcy in Illinois, as elsewhere, means petitioning a federal bankruptcy court for debt relief and protection. You can either surrender assets to repay creditors, through a Chapter 7 proceeding, or set up a repayment plan, through a Chapter 13 bankruptcy. If you have a refund coming from the IRS, you'll need to inform the court-appointed trustee handling your case. In some instances, you must surrender the refund; in others, you may be able to keep all or part of it.

Filing for bankruptcy in Illinois, as elsewhere, means petitioning a federal bankruptcy court for debt relief and protection. You can either surrender assets to repay creditors, through a Chapter 7 proceeding, or set up a repayment plan, through a Chapter 13 bankruptcy. If you have a refund coming from the IRS, you'll need to inform the court-appointed trustee handling your case. In some instances, you must surrender the refund; in others, you may be able to keep all or part of it.

Chapter 7 and Chapter 13

In a Chapter 7 or Chapter 13 bankruptcy, you petition a federal court for an automatic stay of collection actions, including lawsuits, collection calls, garnishments and levies. The Chapter 7 bankruptcy brings about a discharge -- that is, a cancellation -- of all your debts that can legally be discharged. You surrender non-exempt assets to a trustee, who then sells those assets to satisfy your creditors. In a Chapter 13 bankruptcy, you set up a repayment plan to your creditors; most last between three and five years. If you manage to keep up with the payments as scheduled, the case results in the full discharge of any remaining dischargeable debts.

Ready to start your LLC? Start an LLC Online Now

Tax Refunds and Bankruptcy Exemptions

Under bankruptcy law, any asset that was due to you prior to a Chapter 7 bankruptcy filing is non-exempt property. This would likely include any tax refund due from a prior year's tax return; as a result, the trustee may seize your tax refund and use it to repay your creditors. However, Illinois law allows you to claim certain exemptions, including a "wildcard" exemption of any personal property up to $4,000 in value, including tax refunds. In addition, state law also exempts any public assistance benefits. Although the law does not specifically exempt tax refunds, you may exempt refunds that are the result of the IRS earned income credit -- Illinois bankruptcy courts have found that the EIC is a public assistance benefit.

Chapter 13 and Assets

In a Chapter 13 bankruptcy, petitioners must provide information about tax refunds to the court trustee appointed to handle the repayment plan and oversee the bankruptcy case. By federal law, you must provide a copy of your most recent tax return as well as any tax returns you file while the case remains open. These returns will show any refunds that are due from the IRS. If you have entered into a partial Chapter 13 repayment plan, the trustee may seize your tax refund to repay creditors. However, if you have a repayment plan that repays 100 percent of your debt, the trustee is unlikely to seize any tax refunds. The treatment of tax refunds will be spelled out in the repayment plan confirmed by the court.

IRS Seizures and Apportionment

If you file for bankruptcy and have back taxes owing, the IRS retains the right to freeze your refund in order to protect its right to collection. If a couple files a joint return, but only one spouse files for bankruptcy, the Illinois courts have held that the refund is the debtor's sole property, no matter who made the tax payments. This means that the refund would be subject to seizure in full.

Ready to start your LLC? Start an LLC Online Now
Can a Trustee Take Your IRS Refund After Discharge From Bankruptcy in Nevada?

References

Related articles

New Jersey Chapter 13 Rules

Bankruptcy offers filers a chance to get back on their feet financially, paying off some debts and erasing others, though not all debts can be erased through a bankruptcy case. Federal law governs most aspects of bankruptcy, but a few rules and standards are state-specific, such as rules about exemptions. Exemptions allow you to protect certain property from your creditors.

What If My Cosigner Files Bankruptcy?

If your debts have become unmanageable, you have the option of filing for bankruptcy protection. In a Chapter 7 bankruptcy, you surrender non-exempt assets to a court-appointed trustee who uses them to repay your creditors. In a Chapter 13, the trustee administers a repayment plan under which you pay a percentage of your debts. At the end of your bankruptcy, the court discharges or cancels all debts that can legally be discharged. If you have cosigned a loan and your cosignor files for either Chapter 7 or Chapter 13, you may still be responsible for repayment of the loan in full.

What Are Excused Exemptions for a Bankruptcy in Wisconsin?

Before you file for bankruptcy in Wisconsin, you should be aware of the state's laws regarding exempt property — property that cannot be seized by the bankruptcy trustee to repay your debts. Wisconsin has its own schedule of exemptions, which include a house, a vehicle, personal belongings, and any claims in a personal injury lawsuit. An important consideration is the value of the exemption; state law limits the amount you can exempt in each item up to a specific dollar amount.

LLCs, Corporations, Patents, Attorney Help

Related articles

Ways to Exempt Your Refund in a Bankruptcy

If you're contemplating bankruptcy, you probably have a thousand thoughts running through your mind. At the top of that ...

Federal Bankruptcy Rules: Post-Petition Taxes

Bankruptcy may discharge some of your debts, but taxes assessed after you file the bankruptcy petition remain due. Back ...

Can the IRS Levy Wages if You Are in Chapter 13?

A chapter 13 bankruptcy allows you to stop collection actions by creditors, including wage garnishments. You must draw ...

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 ...

Browse by category