If you decide to file a bankruptcy case, what happens to that tax refund check that you are expecting?
In most cases, the the answer is simple: most debtors will be able to have their attorney fill out the bankruptcy forms so that the refund is declared “exempt.” Even if the IRS or DOR issues them the refund check after the date that they file, the debtors will be able to cash the check and use the money as they see fit.
People filing Chapter 13 cases may run into complications, however. Typically, these filers propose a plan that allows them to pay down their debt over a three to five year period. So what happens to any income tax refunds received in years two, three, four or five?
For New Hampshire residents, recent rulings by the New Hampshire bankruptcy court (In re Michaud and In re Watson), say that tax refunds are excess income that must be paid to creditors through the Chapter 13 plan. Arguments that tax refunds are not income, but merely a return of income that has already been accounted for have apparently fallen on deaf ears. Chapter 13 debtors in New Hampshire should be prepared to turn over any future refunds to the trustee, who will pass them on to creditors.
Of course, the problem can be reduced or avoided by many by adjusting witholdings to more accurately reflect actual income. This would be a good topic to discuss with your New Hampshire bankruptcy attorney if you are considering filing under Chapter 13.
By Doug Beaton