Bankruptcy And Your Tax Refund: Can The Trustee Keep My Earned Income Credit?

On behalf of Bankruptcy Law Firm of Clare Casas on Monday, September 13, 2010.

As tax season gets closer, you need to consider how filing a Chapter 7 bankruptcy petition in the latter part of the year will affect your tax refund for the following year.

The bankruptcy trustee is entitled to claim a pro-rated portion of your tax refund. For example, if you file a case in October, 2010 and then receive a tax refund of $6000 when you file your tax return in 2011, the trustee can claim 10 months of that return. If you divide $6000 by 12 months, you get $500 per month. Multiply that by 10 months, and you would have to turn over $5000 to the trustee whenever you get your refund.

Earned Income Credit (“EIC”), however, is exempt from attachment, garnishment or other liens resulting from a bankruptcy proceeding or other legal process. The trustee is not entitled to any portion of the return that is determined to be Earned Income Credit. This protection applies regardless of whether the EIC is received or commingled with your other financial accounts as long as it is traceable. The only exception to this is when a debt is because of child or spousal support obligations.