Are you drowninwg in debt? Have you been contemplating bankruptcy? This is the time of year that many wait anxiously for income tax refunds. For some, tax refunds make it possible to catch up on delinquent mortgage and car payments, to pay some past due bills, or to repay some loans that kept them afloat through the holiday season. For others, tax refunds provide much needed cash to embark on a significant legal transaction, such as a divorce or bankruptcy. If you are considering bankruptcy, you should know some important facts about how your tax refunds might be treated in bankruptcy.
Tax refunds are considered cash in a bankruptcy, regardless of whether you have actually received the money yet. Therefore, it is important for you to consult with an attorney before you file your federal and state income tax returns, or at least before you receive your refunds. When you receive a tax refund prior to filing a bankruptcy, you should never repay loans to family members, friends, or employers, and you should never pay $600.00 or more to any one of your creditors. This does not mean you won't be able to repay your family and friends from your tax refunds; it simply means you may have to wait until after you file a bankruptcy. If you file bankruptcy before you receive your refunds, you may be entitled to keep all or a portion of your refunds, and you may then repay certain debts, including family and friends. This is especially true when a portion of your refunds results from an Earned Income Credit or a Child Tax Credit.
Exemption planning is an important aspect of the services your bankruptcy attorney can provide for you. Exemptions are provided in the Ohio Revised Code (statute) to protect your assets from creditors seeking to collect debts from you, including Trustees assigned in bankruptcy. The Ohio exemption statute protects most of the property you likely possess. For example, there are exemptions to protect equity in your home, equity in your car, retirement accounts, life insurance policies, Social Security and Workers' Compensation benefits, life insurance, household goods and furnishings, electronics and applicances, jewelry, firearms, and business equipment. There is also an exemption to protect cash; however, the cash exemption is limited to $475.00. Cash includes not only what you have in your wallet, but also bank accounts and income tax refunds. There are additional exemptions available to protect Earned Income Credits and certain Child Tax Credits that affect your tax refunds, and there is a "wild card" exemption that allows you to protect up to $1,250.00 of equity in any asset you wish. So, your attorney will examine your income tax returns and carefully evaluate the best way to protect your refunds, just as your attorney will evaluate the best way to protect all of your assets.
Always remember, your attorney will be in the best position to protect you BEFORE you make a move.