How Does Bankruptcy Affect Pensions, Tax Refunds & EIC?

A good understanding of the important details of the bankruptcy estate can help a debtor take full advantage of the right to file for bankruptcy protection.

Pensions and the Bankruptcy Estate

Sections 522(b)(3)(C) and d(12) of the Bankruptcy Code permit a debtor to exempt, usually without any limitation, all funds in most types of retirement plans. There is a $1,000,000 cap, waivable by the court, only with respect to IRA accounts that were not rolled over from another type of plan. A debtor should defer either the filing or the rollover to ensure the filing takes place while the funds are in a qualified plan. Two types of retirement accounts do not qualify under ERISA and therefore are not entitled to its protection. These accounts are certain pensions established by governmental entities and individual retirement accounts (IRAs). It should be noted that IRAs may be exempted from the estate under applicable state law.

Tax Refunds, the Earned Income Tax Credit and the Bankruptcy Estate

The right to receive a tax refund is property of the estate as is a property interest in excessive withholding by an employer which becomes a part of a refund after the filing of the bankruptcy. When such withholdings do result in a refund, the refund is prorated over the entire year with the pre-bankruptcy portion part of the estate. Trustees usually do not check for a tax refund or excessive withholdings as they are usually eligible for exemption.

The earned income tax credit is always excludable from the estate because a debtor can have no legal interest in the credit prior to receiving it or by claiming it on a return. A credit cannot be determined until the end of the tax year; thus, it should not be included in the estate when a bankruptcy petition is filed prior to the end of the relevant tax year.

In the next article in our bankruptcy series we will talk about exemptions and how to remove property from the bankruptcy estate.

Are you in Central Illinois and have a Bankruptcy or Other Debt Issue?

The Kepple Law Group is highly knowledgeable in bankruptcy matters, including the discharge of debts, and can advise clients in all aspects of bankruptcy proceedings.

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