If you’re thinking of filing a chapter 7 bankruptcy case, it’s good to know what will happen to your tax refund if you file your case prior to receiving your refund. For families that are struggling financially, a tax refund can be a difference-maker. So holding on to the refund through the bankruptcy process is important to a lot of people.
Tax refunds that are owed, but not yet received, are property of the bankruptcy estate. That means that any tax refunds that are not exempt have to be turned over to the chapter 7 bankruptcy trustee. Thus knowing whether a tax refund is exempt or not is important in making a decision as to whether or when to file a chapter 7 case.
Whether refunds are exempt usually turns on whether the bankruptcy debtor owns her residence and if so, how much equity there is in the home. Minnesota is an “opt-in” state for bankruptcy law, meaning that a chapter 7 debtor has the option of using Minnesota state law or the federal Bankruptcy Code to exempt property. And what statute to use often turns on homestead real estate equity. Under the Bankruptcy Code, the homestead exemption is modest ($25,150 per debtor), but the Code also gives debtors the ability to use unused homestead exemption money, up to $13,900, to protect other assets that are not otherwise protected. So for people who don’t own the place where they live, protecting a tax refund is doable in almost every case.
The situation gets trickier when a chapter 7 debtor has more than $25,150 in homestead equity. In these cases, it’s best to use Minnesota state law’s $420,000 homestead equity exemption. But Minnesota state law doesn’t give debtors the ability to apply unused exemption dollars to other assets, so in cases in which Minnesota law is used, the tax refund has to be turned over to the chapter 7 trustee.
One exception to this comes from the Minnesota state law the exempts “relief based on need.” Minnesota courts have interpreted the Earned Income Credit and the Minnesota Working Family Credit as relief based on need – so chapter 7 debtors who qualify for those credits can protect the part of the refund that can be traced to those credits.
This issue can get complicated. All the more reason to sit down with one of the attorneys at Kain & Scott to get advice on the best way to handle these issues.
Conclusion
When the time is right, or when you are ready, reach out to Minnesota’s OLDEST bankruptcy law firm at www.kainscott.com. You will be so glad you did!