Tax Refund Strategies by Dennis Babiniec

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As the year comes closer to a close, bankruptcy Trustees are viewing the 2014 tax refunds as possible assets for bankruptcy debtors to turn over.  In order to develop a strategy regarding your expected tax refunds you should be aware that once your bankruptcy case is filed, your strategy if, any, is locked in.  That is why it is important to understand your options regarding tax refunds before you file a bankruptcy case.

The bankruptcy Trustee's job is to look for nonexempt assets to collect in order to pay creditors.  Therefore the starting point to determine a strategy regarding tax refunds is to determine the applicable exemptions.  Since my bankruptcy practice is located in Colorado, I most often use the Colorado exemptions.  However, if the person filing bankruptcy has not lived in Colorado for the two years preceeding the filing of the bankruptcy case, the exemption of the state they lived in two years prior to the date of filing is the source of the applicable exemption.  Some states however, do not allow the use of their exemptions to nondomiciliaries (persons not living in the state), in which case the federal exemptions are applicable.

Once the applicable exemption is known, the next question is whether the person filing bankruptcy would prefer to receive their tax refund and spend it prior to the filing of the bankruptcy or prefer to receive the nonexempt part of the tax refund for expenses after the filing of the bankruptcy.  The answer to the question is usually based on how much of the tax refund is exempt.  If Colorado was the applicable exemption law, the earned income credit and additional child tax credit are exempt.  Therefore, if someone's tax refund was entirely or predominately from earned income credit and/or additional child tax credit, then they would know that the portion of the tax refund within these two categories would not be taken by the bankruptcy Trustee as nonexempt tax refunds.  Therefore, if they preferred to receive the tax refund after the filing of the bankruptcy to help them on their fresh start, that would be a viable strategy.  On the other hand if someone knew that all or most of their tax refund was nonexempt, they could expect to lose the nonexempt portion of the tax refund to the bankruptcy Trustee unless they receive it before they file their bankruptcy and use the proceeds on reasonable and necessary expenses prior to the filing of the bankruptcy and retain proof of how they spent the tax refund.

A proper analysis of the applicable exemption law and how it applies to the expected tax refunds  before a bankruptcy case is filed will give the client a chance to determine what strategy they wish to pursue regarding their tax refunds.  Then once the strategy is determined, the timing of the filing of the case can be consistent with the tax refund strategy to produce the optimum result.

This is one example of how understanding tax refund strategies can produce an outcome more favorable to the person filing bankruptcy.  The tax refund strategy is just one of the factors that I review as I am assembling and analyzing a bankruptcy case.  My goal is to get the best result possible for my clients.

By Dennis Babiniec
bankruptcy attorney
10701 Melody Dr., Ste 350
Northglenn, CO 80234
303-451-9110 

  posted: December 11, 2014 - Dennis Babiniec - Bankruptcy Lawyer - Blog
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