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tax credit(WARNING: The following is Arizona specific) Most people do not understand that if a creditor sues and obtains a judgment they can take the money in your bank accounts, including tax refunds.  The only protection money that is exempt.   I know this does not sound fair – especially when the creditor is taking your child care or earned income credits.  These are monies you need in order to pay rent, buy food, repair your car or take care of health care needs.

Can a creditor really take the money I need to pay rent or buy food?

Each state has certain items “property” that is exempt (creditors cannot take).  Unfortunately, Arizona does not protect child care credit or earned income credits (as of 2019).  See article in the Arizona Republic (AzCentral).  So, if a creditor has the ability to get into your bank account they can take everything except $300 (unless your income is social security or VA benefits – but there are rules governing how to protect those funds).

If I file bankruptcy will I still lose my tax refunds?

tax creditUnfortunately, PROBABLY, assuming you use the Arizona exemptions in your bankruptcy.  The saddest story I hear is when someone files for bankruptcy not understanding they will lose their tax refunds (money they desperately need in order to survive).   Read the AzCentral article about two wonderful families who faced this problem (just two of thousands who face this every year).  One family knew they would lose their refunds because they hired a bankruptcy lawyer so they were not surprised.  Sadly the other family did not know because they filed bankruptcy on their own and never talked to an experienced bankruptcy attorney (most offer free consultations).  That family is living on less than $1,400 per month for a family of 5 and really, really needed the tax credits.  They will lose their entire tax refunds of $9,000 (the cost to hire a great attorney is approximately $1,500).

MUSINGS FROM DIANE:

Unlike most other states, Arizona law is very old and does not protect these tax credits.  The law needs to be changed in order to protect all Arizona families.

tax creditI have a group of wonderful volunteer bankruptcy attorneys (Arizona Consumer Bankruptcy Counsel) who want to change the Arizona law and help protect all Arizona families (even if they do not file for bankruptcy protection).  Please contact me if you know a legislator who cares about families or stories that we can share with a legislator in order to change the law.

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Diane L. Drain

Diane L. Drain, bankruptcy attorney, retired law professor, mentor and community spokesperson.

About Diane Drain:

Diane is a well respected Arizona bankruptcy and foreclosure attorney. As a retired law professor, she believes in offering everyone, not just her clients, advice about bankruptcy and Arizona foreclosure laws. Diane is also a mentor to hundreds of Arizona attorneys.

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