Chicago Bankruptcy Question of the Day: Will I lose my income tax refund if I file for Chapter 7? The answer to this question, as it is so often, is "it depends". There are several factors that have to be taken into account regarding income tax refunds when you file for Chapter 7 bankruptcy protection in Chicago.
The first factor is the timing of your Chapter 7 bankruptcy filing. While the Chapter 7 trustee has the right and the ability to hold your case open until an income tax refund is received, they will rarely do so in the Chicago area unless receipt of the refund is imminent. If you file for bankruptcy protection in the first or last quarter of the year, there is definitely the potential to lose your tax refund to the trustee. If you file mid-year, then it is unlikely that the case will be held open that long.
The second factor is the size of the refund. In Illinois, every debtor is entitled to a personal property exemption of $4,000, commonly known as the "wildcard exemption" when they file for Chapter 7 bankruptcy. So long as this exemption is not needed to protect other property, it can be used to protect all, or at least part of, your tax refund. If your refund is larger than the exemption, then there could be a risk of loss of at least part of the refund.
The third factor is the composition of the tax refund. There are several federal income tax credits, such as the Child Care credit and the Earned Income Credit, that are protected by federal law and cannot be taken by the Chapter 7 trustee. If your refund includes these credits, at least that portion will be protected. Any remaining amount can be protected using the wildcard exemption mentioned above.
Whether it is protected or not, any potential income tax refund must be disclosed when you file for Chapter 7 bankruptcy protection. If it is not exempt, the trustee can go directly to the IRS and intercept the refund, as is their right. This is yet another reason why you must have an experienced Chicago bankruptcy attorney representing you. A good bankruptcy lawyer will ask about your tax refund well before your case is filed, ensure that it is scheduled properly and that all available exemptions are used to protect your refund. They advise you as to when it is strategically best to file your case in order to ensure that your refund is not lost. The experienced bankruptcy lawyers at Ledford & Wu are happy to offer you a free consultation to discuss your situation and plan you Chapter 7 bankruptcy filing to ensure that you keep your tax refund.