Does the Bankruptcy Court have the right to take Earned Income Credit?

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Does the Bankruptcy Court have the right to take Earned Income Credit?

Filing for bankruptcy puts everything you own in your bankruptcy estate. This includes your property as well as tax refunds. In case you have an Earned Income Credit (EIC), the refund can be significant and might be lost in the bankruptcy process. According to Dallas based law firm, the bankruptcy trustee might take your EIC depending on the bankruptcy chapter you filed and bankruptcy exemptions you chose.

What is EIC?

Tax is cut from the paycheck every month. Sometimes the tax is more than what you owe, and you get a tax refund. It is essentially a repayment of your earning but might also include credits, thanks to government lowering the amount of tax owed by you. An EIC is a credit given to working parents that get low wage and might result in a significant tax refund.

What happens to tax refunds in bankruptcy?

When you file for bankruptcy, your entire property becomes a part of your bankruptcy estate. Certain property can be exempted using state or federal bankruptcy exemptions. The non-exempt property is sold by the bankruptcy trustee and the proceeds are distributed among creditors. The tax refunds you get also become part of your bankruptcy estate, even if you haven’t received any refund yet. The trustee can direct the IRS to pay the refund directly to the bankruptcy estate instead of handing over the money to you.

How to protect your EIC in Chapter 7 Bankruptcy?

You can protect your tax refund and EIC by using the exemption. Some states allow you to choose between state and federal exemption. You can choose which property to protect using the exemption. If you have an EIC exemption available, you can protect the amount (even if it has not yet been received). Alternately, a wildcard exemption can be used to protect any property you choose. You can also use a cash exemption to protect your EIC.

In case your EIC is more than the exempted amount, you might end up losing a part of the same. You can decrease the EIC holding by using the amount on necessities like rent, utilities, food, etc. before the bankruptcy filing. An experienced bankruptcy lawyer can help you choose from the various options available.

How to protect your EIC in Chapter 13 Bankruptcy?

The EIC is an asset in case of Chapter 13 bankruptcy and though you might be able to protect EIC funds when you file, you won’t be able to do the same for EIC funds received subsequently. This is because Chapter 13 bankruptcy lasts for 3-5 years. All disposable income is used to repay creditors through the repayment plan. Exemption for EIC is applicable only to that which is received prior to case filing. Any EIC that you get after the case is filed is treated as disposable income. This includes any tax refunds and EIC.

In case you are expecting to receive any EIC benefits, consult bankruptcy lawyers at (888-297-6203) to know how you can keep your EIC or plan for the possibility that you might not have funds available to you.