Will I Receive A Prorated Tax Refund in Chapter 7 Bankruptcy?

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Will I Receive A Prorated Tax Refund in Chapter 7 Bankruptcy?

Phoenix bankruptcy lawyer,tax refund bankruptcy, chapter 7 bankruptcy

I have said before, if you are expecting a substantial tax refund, you need to plan your chapter 7 bankruptcy filing around receiving that refund, it order to prevent its inclusion in the bankruptcy estate. I recently had a client question this point, because her previous attorney had suggested that she need not worry about the date of filing, as her return would simply be prorated.

First of all, let me say flat out that this is bad advice. The idea of the prorated tax return is not as appealing as it sounds and in most cases (especially those bankruptcies filed around tax season) it makes sense to time your bankruptcy accordingly. Below I will explain why.

I have already explained in a previous post that your income tax refund is generally considered part of the bankruptcy estate. The concept of calendar proration is used to determine the portion of the tax refund that can be taken by the trustee. This is how it works:

Consider the scenario in which you want to file for chapter 7 bankruptcy protection and are concerned with how it will affect your tax refund for 2010 withholdings, that you will receive once you file your taxes in 2011.

If you file bankruptcy in 2010 (assume that this was after you already received and spent your refund from 2009 withholdings), the trustee is entitled to a prorated portion of the tax refund you will receive in 2011. This is calculated as a percentage of calendar days, based on your filing date. That is, if you filed bankruptcy on April 15 (the 105 day of the year) the trustee is entitled to a percent of your tax refund equal to 105/365. This amount corresponds to the portion of the tax refund that is attributable to pre-petition withholdings.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Christopher Ariano, Ariano and Reppucci PLLC | Attorney Advertising

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