Friday, February 15, 2013

Protecting Earned Income Tax Credits before filing Chapter 7 in Oregon

This is the time of year that many people are looking forward to - TAX REFUNDS!  Many people each year use tax refund money to catch up on bills, finish home/auto repairs that have been put to the back burner due to lack of money.

If you are considering filing for bankruptcy there are some important things to keep in mind this time of year.  If you file Chapter 7 in Oregon and are subject to Oregon exemption laws there isn't much protection for things like tax refunds.  This means that if you file bankruptcy before you receive your tax refund there is a good chance that your bankruptcy trustee will claim the refund and use the money to pay towards your debt.

There is one big exception to this - EARNED INCOME TAX CREDIT or "EIC".  EIC is exempt under law and can not be taken by a bankruptcy Trustee to pay towards your debt.  If you file a 1040, the EIC will be in bold on page 2 of your tax return.  That is the amount that is off limits to a bankruptcy trustee.

Now, a good pre-bankruptcy planning tool this time of year is to file and receive your tax refunds prior to filing your chapter 7 case.  You can then use the funds on those household necessities that you've been putting off.  You may also pay for your bankruptcy fees with the return (a common practice this time of year).  Make sure to check with your attorney before you start spending the refunds.  You will want to avoid making payments to friends, relatives or large payments to certain creditors.

Since the EIC portion is protected you will also want to separate that amount from the rest of your refund.  You can put the EIC portion aside in a bank account and exempt it in your bankruptcy. The key to this is to not put any other money in that account. If you co-mingle wages, or other funds in with the EIC you can lose the exemption protection.

As an example, if you got a $5,000 total tax refund and $3,000 of the refund was attributable to EIC (remember, it will be set out on page 2 in bold on your 1040 form) you can take the $3,0000 and put it into a savings account.  You can then spend the other $2,000 before filing and apply the EIC exemption to the $3,000 savings. This is a very powerful tool/exemption because it allows a debtor to enter into bankruptcy with a savings cushion to use as they see fit after filing.

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