Tax Refunds and Garnishment during Bankruptcy Proceedings in Arizona

Anticipating the reception of your tax refunds is a glorious moment. When you have debt or you’re in the middle of bankruptcy proceedings, however, this moment could be linked to some anxiety. Will you be entitled to the refund or will it be garnished? What types of tax-related exemptions are you entitled to in Arizona? Luckily, local laws provide clear information about the refund and garnishment during bankruptcy proceedings.

Tax-Related Exemptions and Protections

In Arizona, you can discharge certain types of debt when filing Chapter 7 bankruptcy. In addition, you will be entitled to exemptions that will protect some of your assets and property from being included in the bankruptcy estate.

In most cases, portions of the tax refund are protected under Chapter 7 bankruptcy filing. A tax refund is considered an asset in the state. The amount of the tax refund, however, will determine whether it will be protected 100 percent.

Different types of assets come with an allowable exemption amount. Your attorney will give you a better idea about the amount that you will get to keep. Keep in mind that using some of the exemption on the tax refund could prevent you from exempting other key assets. This is why preliminary planning happens to be so important.

In a Chapter 7 bankruptcy, you will also have to keep another important consideration in mind. For bankruptcy purposes, tax refunds are considered an asset by January 1 of the coming year. If you file bankruptcy after the beginning of the year and before the tax refund is received, it will be counted towards the bankruptcy estate.

Tax refunds received and spent before the filing will generally be outside the estate. If you plan to do so, however, you will once again have to talk to your attorney before spending the money. If you make an excessive unnecessary purchase, you may have some problems.

A Few Additional Tips and Considerations

It’s generally a good idea to make the most of the tax refund before filing Chapter 7 bankruptcy.

In Arizona, you can use your personal assets to make necessary and reasonable purchases. Paying the bills and buying food classify as such purchases. Lavish spending on luxury items, on the other hand, cannot be justified.

Your tax refund could also be used to cover the cost of bankruptcy filing and getting an attorney. Under the circumstances, these are considered reasonable types of spending.

A few additional types of approved expenditure before bankruptcy filing include medical bills, utilities, clothing, car payments, fuel payments and covering educational costs for your kids Making a payment to a family member, repayment of one credit card and the acquisition of luxury goods and services (like an expensive vacation abroad) could potentially trigger a bankruptcy fraud investigation.

The situation will be different for individuals filing Chapter 13 bankruptcy.

Chapter 13 bankruptcies feature a three to five-year repayment plan instead of immediate debt discharge. Thus, tax refunds over this entire period will be subjected to scrutiny by the bankruptcy trustee.

garnishment during bankruptcy proceedingsPeople who are capable of making their debt payment under the plan will generally see no complications as a result of the received tax refund. The trustee, however, has the right to keep a tax refund over the course of the plan when the debtor makes less than 100 percent of the necessitated payment.

A person that has filed Chapter 13 bankruptcy will be allowed to keep the full tax refund if they are facing serious financial difficulties. In such instances, the trustee will reevaluate the plan to address unforeseen hardship.

A person that hasn’t filed bankruptcy cannot keep the tax refund protected from garnishment. The US Treasure Offset Program allows federal agencies to collect outstanding debt by taking tax refund for the purpose. If you have a lot of debt and you’re worried about garnishment during bankruptcy proceedings, see an Arizona bankruptcy attorney immediately.