Sign Up for Updates

Income Tax Refund and Bankruptcy In Kansas

by Adam Mack

Note: this is an area of law that is still evolving and the information in this article is accurate as of the date of posting. Please consult a qualified Kansas bankruptcy attorney for more information regarding any recent updates to the law.

For those who receive tax credits, their income tax refund is often a major financial boost that they have come to rely on. If you’re facing the prospect of bankruptcy, such a boost is especially valuable. There is good news and bad news, though, when it comes to tax refunds for Kansas bankruptcy filers.

The Bad News
Depending on what time of year you file bankrupcy, much of a tax refund is not exempt and is therefore claimed by the trustee.[1] Any tax withholding that occurred before filing bankruptcy is considered part of the bankruptcy estate, even though the tax return itself probably won’t be filed until after the bankruptcy is discharged. So, for example, if someone filed in February, all the excess withholding from the first two months of the year is part of the bankruptcy estate. Other credits (with the exception discussed below) are likewise apportioned according to when you file bankruptcy and the part that was earned prior to filing bankruptcy must be turned over to the trustee.

The Good News
Kansas bankruptcy law is usually quite generous toward filers, and its treatment of tax returns is no exception. Our state legislature has carved out a tax refund exemption for those who need it most, namely for those who receive the Earned Income Credit. The Earned Income Credit portion of a tax refund can be claimed as exempt in its entirety – no matter when you file.[2]

It should be noted that this is a relatively new exemption and that it is being challenged in the courts by the bankruptcy trustees. As of right now, the Earned Income Credit exemption is available for bankruptcy filers, but it’s possible that will change down the road. Potential changes like this to the law are yet another good reason to consult a qualified Kansas attorney if you’re considering bankruptcy.

[1] In re Barowsky, 946 F.2d 1516 (10th Cir 1991).

[2] K.S.A. 60-2315