Can a bankruptcy trustee take our child adoption credit tax refund?

Our bankruptcy was discharged in 2010. We completed adoption of 2 children later that year. We received a letter from the bankruptcy Trustee informing us that we must deliver copies of our 2010 state and federal income tax returns to them or to our lawyer and to also remit our refund checks when they are received. The letter also concludes that a portion of our income tax refund belongs to the bankruptcy estate. Is the Child Adoption Refundable Credit (IRS tax form 8839) exempt from the bankruptcy estate?

Asked on March 6, 2011 under Bankruptcy Law, Kansas

Answers:

Mark J. Markus / Mark J. Markus, Law Offices of

Answered 9 years ago | Contributor

Exemptions are determined by state law.  Exemption laws are based on the state where you resided for the 2 years prior to filing your bankruptcy case or, if you lived in more than 1 state during that period, in the state where you resided for the greater part of the 180 days prior to that 2 year period.  I doubt that a "credit" is ever exempt in any state.  The issue is whether the tax refund is exempt and that will depend on the above, as well as whether you scheduled the asset (the tax refund) and exempted it on your bankruptcy papers. 

The discharge date is completely irrelevant.  The amount owed to the Trustee is based on when your case was filed.  The Trustee is entitled to the percentage refund that you earned as of the date your case was filed.  If you filed, for example, on July 1, 2010, the Trustee would theoretically be entitled to 50% of your refund for that year, assuming you worked continuosly through the year.   I'm not sure how the Child Adoption Credit works (i.e. whether it is a separate payment to you, or something that gets credited on your taxes).

Mark J. Markus, Attorney at Law

Handling exclusively bankruptcy law cases in California since 1991.

http://www.bklaw.com/

 

Mark J. Markus / Mark J. Markus, Law Offices of

Answered 9 years ago | Contributor

Exemptions are determined by state law.  Exemption laws are based on the state where you resided for the 2 years prior to filing your bankruptcy case or, if you lived in more than 1 state during that period, in the state where you resided for the greater part of the 180 days prior to that 2 year period.  I doubt that a "credit" is ever exempt in any state.  The issue is whether the tax refund is exempt and that will depend on the above, as well as whether you scheduled the asset (the tax refund) and exempted it on your bankruptcy papers. 

The discharge date is completely irrelevant.  The amount owed to the Trustee is based on when your case was filed.  The Trustee is entitled to the percentage refund that you earned as of the date your case was filed.  If you filed, for example, on July 1, 2010, the Trustee would theoretically be entitled to 50% of your refund for that year, assuming you worked continuosly through the year.   I'm not sure how the Child Adoption Credit works (i.e. whether it is a separate payment to you, or something that gets credited on your taxes).

Mark J. Markus, Attorney at Law

Handling exclusively bankruptcy law cases in California since 1991.

http://www.bklaw.com/

 


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