Bankruptcy - take refund

[oceanlovin'ea]

I have a copy of a letter sent by a bankruptcy trustee to one of my clients. It tells them that they cannot spend their refund. They cannot do direct deposit.
The check has to go to the trustee and she will determine if it will go to the creditors or if the client will get to keep it.
This was a chapter 7 bankruptcy.....didn't include house.

I have never heard of this before. Has anyone else?

Linda, EA

[taxmandan]

Yes I've seen it several times. One client this year said the trustee didn't take their refund last February but they did have to give him a copy of their '09 return. Depends on how aggressive the trustee is, about paying off creditors.

[kpangelinan]

Don't know for sure....

I've never heard of this.....the few BK's that I've been involved with allowed a certain refund (via direct deposit) and the rest goes to the trustee, but from the taxpayer only and not by sending the check to them.....BK Trustees can't cash one's IRS check. Maybe, they want to see the check to verify the amount of the deposit (if they don't trust a copy of the returns), then hand it back to the client to cash themselves and return his/her portion.

Maybe states and Trustees differ, but the BK code is a federal program with their state courts varying slightly with their statutes.

[oceanlovin'ea]

just first year

Did they just do this for the first year? Or is it a continual process.

These people filed chapter 7 and do not have to pay back any creditors. So I don't understand why they would take tax refund to pay back creditors.

Letter says "I have asked the IRS to send your check directly to me. Once I have receeived a copy of your tax return, I will notify you what action I will be taking regards the refund."

If she got the refund check, she can't cash it. It's not made out to her unless they signed POA. Don't think I would do that.

Linda, EA

[kpangelinan]

Did they just do this for the first year? Or is it a continual process.

These people filed chapter 7 and do not have to pay back any creditors. So I don't understand why they would take tax refund to pay back creditors.

Letter says "I have asked the IRS to send your check directly to me. Once I have receeived a copy of your tax return, I will notify you what action I will be taking regards the refund."

If she got the refund check, she can't cash it. It's not made out to her unless they signed POA. Don't think I would do that.

Linda, EA

Just the year in which the Chapter 7 was filed and for Chapter 13's, it's every year until the 13 is discharged, which is 3-5. She could have signed a POA allowing the trustee to receive the check, but he surely can't cash it!

[oceanlovin'ea]

Thanks for your help.

First time I have run into this situation. Every year it is something new. We never learn it all.

Linda, EA

[Burke]

Every year it is something new. We never learn it all. Linda, EA

Every year I think I must by now have seen everything, and every year I am proven wrong.

[kpangelinan]

Every year I think I must by now have seen everything, and every year I am proven wrong.

Ditto.......