Chapter 7 Bankruptcy Trustee Robert Whitmore
From the Chapter 7 Bankruptcy Trustee’s viewpoint, there are no internal costs to receive a debtor’s tax refund. Normally, the trustee does not have to hire an attorney and does not have to have potential litigation. The Trustee can file a statement with the IRS to have the tax refund sent directly to him, if the trustee knows that a tax return is out there.
What usually happens is that the bankruptcy trustee asks the client for the non-exempt tax refund and the debtor usually turn over the tax refund which the bankruptcy trustee uses to benefit the bankruptcy estate.
This problems occurs in the February, March, April, May time frame as when taxes are due and people receive tax refunds.
Sometimes, attorneys forget to list a potential tax refund in the petition. This tax refund though is the debtor’s asset and must be listed in the petition.
The problem occurs when the attorney files the BK, and fails to disclose the asset and the debtors receive the money after the case is filed and then spends the tax refund before the hearing. The Trustee asks for the money, and there is no money left. The trustee then ask the bankruptcy estate be paid from some other source, which creates a hardship for the debtor and the attorney. Even though the amount of the tax refund may be small, the Bankruptcy Trustee still earns his statutory commission of 25% on the first $5000 received for the benefit of the estate.
Advise the client that the tax refund may be exposed. A tax refund is like cash to a bankruptcy trustee. If the amount is not exempted, then the Bankruptcy Trustee like Mr. Whitmore can ask that the Tax refund be turned over for the benefit of the bankruptcy estate.