Income Tax Return

[Reese]

I filed bankruptcy, CH 13, in Oct 2006.  I filed my income tax return(1040EZ)in January and received a net refund from ST & Fed of $500 via direct deposit and spent the money. In February I received notice from my lawyer and Trustee that the government is entitled to my tax return and I need to send the trustee a copy so that they know to expect the funds, even thought I already have the money. Since I have received the money from the government, isn't this MY money?  Do I need to pay the trustee for something that I over paid?  If so what is the deadline to pay the money back? I live in Michigan.  Thanks.

[Ardleigh]

Perhaps an argument can be made that you are entitled to "exempt" part of the 2006 refund? You should talk to your lawyer about doing that, and see if that is possible in your case. If so, I think the exemption would apply only to '06, but probably not to future years.

The trustee's position is that the refunds represent additional disposable income, which you should not be allowed to keep without proving that it is needed to be spent on reasonably necessary living expenses that had not already been provided for in your budget.

Your state law concerning these issues is extremely unfriendly to debtors and is very biased in favor of the banks and creditors. Unlike many states, Michigan does not have a wild card exemption allowing you to pick and choose the assets that you want to keep, such as a tax refund.

However, in doing some research I found that Michigan does have the following:

"Exemption for Wages 60% of earned but unpaid wages for head of household Michigan Law 600.5311"

I would argue that 60% of the refund is your exempt property because it represents "earned but unpaid" wages because you earned the money, and it was deducted from your wages before the money was ever paid to you. Therefore, you should be entitled to keep 60% of the '2006 refund. Try that argument, and amend your schedule of exemptions to claim 60% of it,(but no guarantees). Let me know how it works!