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Bankruptcy Law/Income Tax return

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Expert: - 4/4/2007


Question
I filed bankruptcy, CH 13, in Oct 2006.  I filed my income tax return (1040EZ)in January and received a net refund from ST & Fed of $500 via direct deposit and spent the money. In February I received notice from my lawyer and Trustee that the government is entitled to my tax return and I need to send the trustee a copy so that they know to expect the funds, even thought I already have the money. Since I have received the money from the government, isn't this MY money?  Do I need to pay the trustee for something that I over paid?  If so what is the deadline to pay the money back? I live in Michigan.  Thanks.

Answer
Perhaps an argument can be made that you are entitled to "exempt" part of the 2006 refund? You should talk to your lawyer about doing that, and see if that is possible in your case. If so, I think the exemption would apply only to '06, but probably not to future years.

The trustee's position is that the refunds represent additional disposable income, which you should not be allowed to keep without proving that it is needed to be spent on reasonably necessary living expenses that had not already been provided for in your budget.

Your state law concerning these issues is extremely unfriendly to debtors and is very biased in favor of the banks and creditors. Unlike many states, Michigan does not have a wild card exemption allowing you to pick and choose the assets that you want to keep, such as a tax refund.

However, in doing some research I found that Michigan does have the following:

"Exemption for Wages
60% of earned but unpaid wages for head of household
Michigan Law 600.5311"

I would argue that 60% of the refund is your exempt property because it represents "earned but unpaid" wages because you earned the money, and it was deducted from your wages before the money was ever paid to you. Therefore, you should be entitled to keep 60% of the '2006 refund. Try that argument, and amend your schedule of exemptions to claim 60% of it, (but no guarantees). Let me know how it works!  

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Los Angeles Bankruptcy Lawyer Leon D. Bayer

Expertise

Leon Bayer has successfully represented clients in bankruptcy for over 30 years. He is frequently called upon by the media, the California Bar and other associations to provide insight and help educate attorneys on bankruptcy issues. If you or other readers want to keep up with my blog postings about life in and out of bankruptcy, you can follow my blog at http://www.bankruptcyblogger.org/ and my personal web site at http://www.debt-relief-bankruptcy.com and A Human Guide to Bankruptcy at http://www.thebankruptcyguide.net/ Leon also writes about bankruptcy law for Nolo, see http://www.nolo.com/law-authors/leon-bayer.html and his "Ask Leon" bankruptcy law blog column at http://blog.nolo.com/bankruptcy/

Experience

Leon is a Certified Specialist in Bankruptcy Law by the State Bar of California, and has been a practicing bankruptcy lawyer in Los Angeles, California for 33 years.

Organizations
National Association of Consumer Bankruptcy Lawyers, California Bar Association, Los Angeles County Bar Association.

Publications
Author, ?The Essentials Of Chapter 13,? Daily Journal Report, December 18, 1987.
Contributing Editor, Basic Bankruptcy, California Practice Handbook, Matthew Bender 1992, 1993.
CEB Consultant, CEB-Personal and Small Business Bankruptcy Practice in California, 2003.


Education/Credentials
B.A., J.D.

Awards and Honors
President, 1995-1996-Los Angeles Bankruptcy Forum; Member - Los Angeles County Bar Association Committee on Commercial Law & Bankruptcy, 1988. Law Advisory
Commission-Personal & Small Business Bankruptcy Law of the State Bar of California, 1996-2000

MR. BAYER SAYS: The big banks and credit card companys have been working overtime for many years to undermine the Consitutional right of the American people to be able to claim bankruptcy protection. In 2005 the banking lobby successfully convinced Congress and the President to make the laws and proceedures more complicated, hopeing that it will stymie legitimate people from filing bankruptcy. They succeeded in gaining these complex new legal proceedures by greasing the legislative system with hundreds of millions of dollars in "campaign contributions." The good news for the American people is that while the new laws have made the proceedures needlessly complex to the point where inexperienced people can't help but trip over the maze of new rules and regulations, the process is still doable, especially with a lawyer who is well trained and experienced in this specialty.

Past/Present Clients
I have probably handled something on the order of about 15,000 bankruptcy cases thropughout my career.

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