Can the Trustee Take My Child Tax Credit in Chapter 7?

Filing for Chapter 7 bankruptcy involves liquidating certain assets to settle debts. For parents, a concern is whether their Child Tax Credit (CTC) could be seized during this process. The treatment of tax refunds, including the CTC, depends heavily on the timing of the bankruptcy filing. This article explains whether a bankruptcy trustee can claim your Child Tax Credit and the steps you can take to safeguard this financial resource.

The Bankruptcy Estate and the Trustee’s Role

When a Chapter 7 bankruptcy case is initiated, a legal entity known as the “bankruptcy estate” is created. This estate comprises all of the filer’s property and interests in property at the moment of filing. The scope is broad, encompassing everything from physical assets like cars and real estate to financial assets such as bank accounts and anticipated tax refunds.

A court-appointed Chapter 7 trustee oversees the case. The trustee’s job is to review the assets listed in the bankruptcy petition, identify any property not protected by law, and liquidate it. The proceeds from selling these non-exempt assets are then distributed among the creditors.

If the Child Tax Credit is considered part of the bankruptcy estate and is not protected by an exemption, the trustee has the authority to take it for the benefit of creditors. This is why the status of the CTC is a concern for filers.

When the Child Tax Credit Becomes Estate Property

Whether your Child Tax Credit is part of the bankruptcy estate depends on its status when you file. Any portion of the credit you have a legal right to before filing the petition is considered estate property. The legal right to the funds is the asset, even if you have not yet received the money from the IRS.

Trustees use a proration method to determine the estate’s interest in a tax refund for the year of the bankruptcy filing. For example, if you file for Chapter 7 on September 30, you have completed about 75% of the tax year. The trustee would then claim that 75% of your anticipated Child Tax Credit for that year belongs to the bankruptcy estate, while the remaining 25% is yours.

This proration applies to the CTC and other refundable credits in your tax refund. The legal entitlement to the future refund is what places the prorated portion within the bankruptcy estate, not the receipt of the cash.

While special federal legislation has sometimes provided explicit protection, these measures are not permanent. The American Rescue Plan Act of 2021 shielded the enhanced Child Tax Credit, but this protection was temporary. Absent such specific legislation, the standard rules of proration and exemption apply to the CTC.

Using Exemptions to Protect Your Tax Refund

Even if a portion of your Child Tax Credit becomes estate property, you may not lose it. The U.S. Bankruptcy Code and state laws provide “exemptions,” which are legal tools that allow you to protect certain property up to a specific dollar amount.

When filing for bankruptcy, you must choose between the exemptions provided by federal law or by your state of residence, though some states require you to use the state list. This choice is important because the types and amounts of property you can protect vary widely between the federal and state systems.

The most common tool for protecting a tax refund is the “wildcard” exemption, which can be applied to any type of property. Under federal exemptions, the wildcard allows a filer to protect $1,675 of any property. This amount can be increased by adding any unused portion of the homestead exemption, up to an additional $15,800, and these amounts are doubled for joint filers.

Many states offer a similar wildcard exemption, though the amounts can differ. Some states also have specific exemptions that can protect public benefits or tax credits directly. If such a specific exemption exists, it can be used to shield those funds.

How to List the Child Tax Credit on Bankruptcy Forms

You must be transparent with the court and the trustee about your anticipated tax refund, including the portion from the Child Tax Credit. Properly documenting your assets and exemptions on the official bankruptcy forms is required to protect them. Failure to disclose an asset can lead to serious consequences, including the denial of your bankruptcy discharge.

First, you must list the prorated, pre-filing portion of your anticipated tax refund as an asset on Schedule A/B: Property. This includes calculating the value of the refund that is considered part of the estate based on your filing date.

Next, you will use Schedule C: The Property You Claim as Exempt to protect the asset. On this form, you list the anticipated tax refund again and cite the specific exemption law that allows you to protect it, such as the federal or state wildcard exemption. You must also state the dollar amount of the refund you are claiming as exempt.