What happens to Stimulus rebate / tax refund in bankruptcy? - part2

Question: Why can a trustee take a tax refund I receive after I file?

In many bankruptcy districts, trustees view tax refunds as being increasing owned during the tax year the refund is for. For example, many trustees view a tax refund received in mid 2008 based off the filing by April 15, 2008, as being increasing owned during 2007. This makes sense because the tax refund is really income earned in the previous year that the government held onto, but is refunding since they are not entitled to keep it. If the tax refund is not exempted, it’s fair game for the trustee to seize the tax refund, just like any other previously earned and non-exempt income.

Argument for stimulus payment being “hands-off”, if received after you file

In my opinion, if your receive a stimulus payment after you filed bankruptcy, a trustee should have at most the same claim to the stimulus payment as they would on any tax refund covering the year 2008 — which would be refunded mid next year based on the tax return filed by April 15, 2009.

U.S.C. 26 §6428(a) as amended by the ESA2008 indicates the stimulus payment is a credit on the tax liability for the tax liability during 2008, not 2007! Almost no individuals use a fiscal tax year, so it’s a credit on the tax liability during January 1, 2008, to December 31, 2008.

U.S.C. 26 §6428(g) as amended by the ESA2008 indicates this 2008 tax credit may be credited and rebated a year in advance, if the taxpayer qualifies for the stimulus payment on their tax return for 2007.

Since the ESA2008 indicates the stimulus payment is a credit on the tax liability during January 1, 2008, to December 31, 2008, I think trustees should have to treat the stimulus payment identically to any tax refund covering the year 2008, which would be refunded mid next year based on the return filed by April 15, 2009. I don’t think trustees should be able to treat the stimulus payment the same as any tax refund covering the year 2007, which will be refunded in the next few months based on the return filed by April 15, 2008.

Therefore, in my opinion, a trustee should at most be able to seize a percentage of your stimulus payment based on when you filed your bankruptcy. For example, if you filed in late March, 2008, I think a trustee should at most only be able to seize 3/12 of your stimulus payment. However, if you file in late December, 2008, I think a trustee should be able to seize all of your stimulus payment, if it’s not exempted.

If a trustee treats it this way, they are very unlikely to seize a small percentage of your stimulus payment because it just wouldn’t be worth their time.