Each year, right around April, Nebraska residents wonder how their Chapter 7 bankruptcy will affect their tax refund. Do you get to keep it, or does it go directly to your creditors?
The fact is that each year those who file taxes and simultaneously have a Chapter 7 bankruptcy pending lose their tax return to the bankruptcy trustee. This happens despite the fact that tax returns are considered protected assets under Nebraska law. In other words, this should very rarely happen.
The Omaha bankruptcy attorneys at Burke Smith Law can help debtors protect their Nebraska tax refund from creditors. Contact us today to learn how we can help set you on the path to financial freedom.
Nebraska Tax Refunds Are Considered Protected Assets
Those who have filed for Chapter 7 bankruptcy generally understand that their assets will be liquidated to the extent possible in order to pay off their creditors. Some assets, on the other hand, are protected from liquidation. In other words, the trustee may not go after certain kinds of assets when liquidating your estate.
Protected assets include your car, your home, and any assets that you own that help you with your work. In addition, Nebraska tax refunds are among the assets that you can claim as protected – but there is a limit to how much you can protect.
These laws are known as exemption laws. Two exemption statutes are relevant to Nebraska tax refunds. Those are:
- Nebraska Statute 25-1556 known as the Wild Card Exemption
- Nebraska Statute 25-1552 known as the Earned Income Credit
The Wild Card Exemption allows a debtor to protect up to $2,500 of personal property. Tax refunds are considered personal property. Married couples filing together are entitled to keep $5,000 in personal property.
The Earned Income Credit exemption allows a debtor to keep the full sum of the earned income credit of their Federal and Nebraska tax refund. There is no dollar limit to this exemption.
I Lost My Nebraska Tax Refund to Chapter 7 Bankruptcy
Unfortunately, this happens too often. If your bankruptcy attorney neglected to conduct a full interview and simply filed your papers, there is nothing exempting a bankruptcy trustee from trying to take that money in order to satisfy your creditors.
While appointed by the court, the bankruptcy trustee is not a neutral party. His job is to liquidate as much of your estate as possible for the purpose of paying back your creditors. He actually gets a percentage of anything he can find to liquidate.
Your attorney’s job, on the other hand, is to protect you and your assets to the extent possible and ensure that your financial documents are ready for the court. Unfortunately, not all bankruptcy attorneys are made equally. Some simply do the bare minimum. In a case in which your Nebraska tax refund was liquidated by the trustee when it didn’t need to be, your bankruptcy attorney did not do their job effectively.
The trustee, on the other hand, did an excellent job. Once that money is gone it is gone for good. Giving it to your creditors when it was exempt did not do anything to put you in better standing financially. You still:
- have a bankruptcy listed on your credit report for the next 10 years,
- cannot file for a bankruptcy for another 7 years, and
- have to make a concerted effort to rebuild your credit.
Your giving creditors money that you are entitled to exempt does literally nothing to make your situation better.
Am I Limited in What I Can Do With an Exempted Nebraska Tax Refund?
Not precisely. There are certain things that you should avoid. One of those things is paying back loans to family members or business partners. The folks are considered “insiders”. In other words, a trustee will be very suspicious of such a transaction and may have the power to reverse it.
Additionally, if you spend your tax refund on a new boat while simultaneously applying for bankruptcy, the trustee will look at your new boat as a liquidatable asset. In other words, while they can’t touch the money, you should be careful what you spend it on. You will have to explain what you spent the money on to the trustee.
Contact a Bankruptcy Attorney and Protect Your Nebraska Tax Refund From Creditors
Burke Smith Law specializes in helping Nebraska residents navigate bankruptcy. We can also help you protect your Nebraska tax refund. Give us a call and we will ensure that all your exempted assets are protected.