When considering personal bankruptcy, many clients ask, “Will my income tax refund be taken?” The answer to that question is that, “it depends”, regardless of whether you are filing an Ohio Chapter 7 bankruptcy or an Ohio Chapter 13 bankruptcy.
Whether an individual’s income tax refund becomes a part of the bankruptcy estate depends on when the bankruptcy is filed with the United States Bankruptcy Court. For instance, if an individual files bankruptcy after that individual has both filed and received their income tax refund, it is highly unlikely that their income tax refund will become a part of the bankruptcy estate. However, if a person files for bankruptcy shortly before or shortly after filing their income tax return, then it is very likely that a person’s income tax refund will become part of the bankruptcy estate. This is because the person is yet to have received their income tax refund, and that money can be used to pay off the person’s existing creditors.
However, if you happen to file your income tax refund in or around the same time that you file for bankruptcy that does not necessarily mean that your entire income tax refund will become a part of the bankruptcy estate for the distribution to your creditors. In Ohio, portions of your income tax refund attributed to the Child Tax Credit and the Earned Income Tax Credit cannot become part of the bankruptcy estate. O.R.C. 2329.66(A)(9)(g). For instance, if you have an income tax refund for $4000, and $2500 is attributed to the Child Tax Credit and the Earned Income Tax Credit, then the most that can become part of the bankruptcy estate is $1500.
It is best to address a qualified bankruptcy attorney with specific questions about the implications of filing for bankruptcy shortly after filing and/or receiving your income tax refund. Your bankruptcy lawyer can help you determine the timing that will be best for you. It is important to note, that you should never spend your income tax refund after it has been determined that it will become a part of the bankruptcy estate. This can result in serious consequences, such as your bankruptcy being denied.