When you consider that approximately 85% of people filing bankruptcy in Michigan are entitled to a tax refund, the connection between taxes and bankruptcy begins to become less subtle. Your tax returns from prior years are used as evidence of your adjusted gross income during a bankruptcy case. These are provided to the trustee in bankruptcy before your meeting of creditors.

Taxes deducted from your paycheck are NOT counted as income for purpose of the Schedule I income calculation. This is important in a Chapter 7 where your monthly expenses must exceed your income. It is also important in a Chapter 13 where Schedule I might be used in calculating your plan payment.

Any tax refund you might receive affects and is affected by your bankruptcy as well.

In a Chapter 7, your refund is property of the estate and is subject to seizure if it is received within 90 days before filing or up to 180 days after discharge in many situations. If it is not received in that period, the Eastern District of Michigan indicates that it still has to be prorated and exempted. In a Chapter 7, if you can plan a little ahead, you may be able to prevent this money from being used to repay your creditors.

If you have no home equity to exempt and very little other assets your tax refund will probably be exempt. The key word is probably. It is important to get expert legal advise to find out how your tax refund is going to be handled in a bankruptcy case. Your tax refund amount matters less if you do not qualify for a Chapter 7 and file Chapter 13 instead because that money will likely end up with the trustee.

Please consult Chimko and Associates at 877.334.3922 for details more specific to your case.