April 28, 2017
This blog is about State income tax refund garnishments, not federal. Your federal income tax refund can typically only be garnished for federal or related government obligations. If you owed the IRS, child support back pay, or federal student loans, your federal income tax refund can potentially be garnished.
Private creditors can also garnish against State income tax refunds. This often comes as a surprise to individuals who are expecting a refund but instead receive notice that the State has withheld their funds due to a creditor garnishment.
You will know if your state income tax refund was garnished in most cases when you receive a Notice of Adjustment from the State. Creditors are also required to serve you with a copy of the paperwork they filed with the court to be able to garnish your tax refund. This is called the Request & Writ for Garnishment.
Typically, if an unsecured creditor garnishes funds from your wages or bank accounts within 90 days of filing for bankruptcy, you may be able to demand the return of those garnished funds from that creditor once the bankruptcy is filed.
The recovery process for wages and bank accounts is relatively straightforward. However, income tax refund garnishments can be more complicated. Here’s why:
Creditors may file income tax garnishments with the Michigan Department of Treasury as early as November 1 for the current tax year. Further, the Treasury acts upon income tax garnishments on a first filed-first served basis. The earlier the creditor files, the better their chance of intercepting your tax refund.
This muddles the “90-day” recovery rule as you will not receive the Notice of Adjustment until you file your taxes but, the creditor could have filed the garnishment as early as November. If you do not file your taxes until March or April, the garnishment could have occurred outside of the 90 days, meaning returning those funds to you may not be possible under the bankruptcy code.
This can be complicated and can depend on the specific timing and dates of the document filings and the bankruptcy itself. It is something you should discuss with an attorney who knows the bankruptcy code. If you would like to discuss your options with a Grand Rapids bankruptcy attorney, call us today at 616-364-2100. If you would like to learn more about this or other bankruptcy related questions, pay us a visit at www.kalawgr.com. We look forward to hearing from you.