• Fri. Jul 1st, 2022

Arizona bill would prevent state from accepting tax refunds in bankruptcy

ByDebra J. Aguilar

Apr 15, 2022

Tens of millions of Americans are eagerly awaiting income tax refunds as a way to pay off debt, buy basic necessities and get their finances in order. For many people, refunds are the single largest payment they will receive all year.

“We would use it to buy clothes, shoes and stuff the kids might need like school uniforms for the coming year,” said Kyle Hebenthal, a 38-year-old truck driver who lives in Surprise with his wife, Suzanna, 36. and their two children.

But Kyle and his family will not receive their reimbursement this year.

Current state law bars debtors like the Hebenthals from receiving tax refunds if they recently filed for bankruptcy before obtaining the funds. Arizona is one of only two states, along with Montana, that diverts money from refunds to creditors and is used to cover bankruptcy administration costs, Chandler’s bankruptcy attorney said, Kenneth Neley.

Tax refunds at stake for some

A bill before Arizona lawmakers, Senate Bill 1222, would change that by exempting federal tax refunds from the list of personal assets used to pay off debts. The legislation passed the Senate on a bipartisan vote and awaits a vote in the House.

Neeley, whose firm represents the Hebenthals, said he supported the measure as a way to give debtors a fresh financial start. But critics argue the measure could mean fewer creditors large and small would be paid in full – if at all.

The two main types of federal tax breaks that increase refunds for moderate-income taxpayers are the earned income tax credit and the child tax credit. The EITC, in particular, is considered an important federal anti-poverty program.

This tax relief was claimed by 555,000 Arizona households in 2020, the most recent year for which the Internal Revenue Service released figures. The average amount was $2,478.

In addition, the IRS paid child advance tax credits averaging $462 to 795,000 Arizona households last year. Advance payments were a special program for 2021 designed to provide pandemic relief to households before they actually file returns for the year.

The proposal would also cover Arizona tax refunds if they were attributable to a state EITC or child tax credit, Neeley said, although Arizona does not currently have those provisions. .

Help pay for necessities

Suzanna Hebenthal said that before they filed for bankruptcy, the money from the tax refund helped them get back on track. “We would never ruin it or take a vacation,” she said. “We always used it to buy basic necessities.”

One item they will likely cut from their budget this year is summer camp for their son and daughter. “We probably won’t do that now,” Suzanna said. “We will have to pay someone to watch them during the day.”

The couple, who filed for Chapter 7 bankruptcy in January, said their financial difficulties increased when they separated last year and when Suzanna lost her job for about six months. The split “essentially meant maintaining two households,” she said.

This type of situation is common, Neeley said. “Many people saw their income drop during COVID or had to deal with medical bills, separation, etc.,” he said. “They were counting on those tax refunds to rebuild.”

How much of a fresh start?

Bankruptcy filings are designed to help people restart their financial lives by removing many types of debt. Those going through the process need a bit of cash to get back on their feet, and that’s where tax refunds could help.

With the Chapter 7 “fresh start” process, people filing for bankruptcy typically only have to hand over one year of tax refunds, Neeley said. But in Chapter 13 debt reorganization cases, debtors could lose their tax refunds for up to five years, he added.

“Allowing families to keep those dollars means they can better afford basic everyday expenses like rent, groceries and gas,” said Sen. Sean Bowie, D-Phoenix, the legislation’s lead sponsor. .

Neeley said he doesn’t think the proposed bill is really a partisan issue except where special interests are involved, citing banks and debt buyers who he says often buy IOUs for pennies on the dollar and are not the original creditors.

When tax refunds are accessed by a trustee in bankruptcy, about a third of the money on average will be used to pay court administration costs and the rest to pay down debts, he estimated.


How to protect your credit

Your credit score can land you the job of your dreams or prevent you from getting a mortgage. Republic reporter Rebekah Sanders explains how you can protect yourself from mistakes on your credit report.

Small creditors too

But Marcus Osborn, a Scottsdale lobbyist representing Arizona bankruptcy trustees, said parties who could lose if the bill becomes law include small property owners, various other small businesses and former spouses who could be deprived. child support.

“Everyone thinks it’s just credit card debt, but there are other types, including child support, rent, and tax debt,” Osborn said. “Every time you take sources of money out of the bankruptcy process, some creditors won’t get paid.”

Osborn, senior director of government relations at law firm Kutak Rock, said creditors in a typical bankruptcy include a mix of large and small businesses, including individuals. Most of the more than 130 parties that have expressed their opposition to the bill on the azleg.gov website are individuals, as well as representatives of groups such as the Arizona Free Enterprise Club and the Arizona Creditor Bar Association.

Supporters include various individuals and representatives from groups such as the Arizona Center for Economic Progress, Arizona Council of Human Service Providers, and UnidosUS.

Neeley cited research from Harvard University indicating that nearly two-thirds of bankruptcies are triggered primarily by medical debt.

Do you have medical debt? You may see relief on credit reports

The calm of bankruptcy before the storm?

About $10 million a year in bankruptcy-hit tax refunds received by Arizonans could be at stake and possibly much more if filings ramp up.

Over the past two years, deposits here and nationally have plunged as families have been helped by federal stimulus payments, improved unemployment benefits, an improving labor market and higher minimum wages. in states like Arizona.

Nationally, deposits for the first quarter were still 17% lower than the same period in 2021, according to Epiq Bankruptcy and the American Bankruptcy Institute. However, filings in March this year jumped 34% from February 2022, possibly signaling a trend reversal.

In any case, not everyone has rebuilt their finances or is not in good shape. The state’s current policy of not protecting tax refunds “hits the most desperate 2,000 or 3,000 families in Arizona,” Neeley said.

Contact the reporter at russ.wiles@arizonarepublic.com.