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creditors grabbing your tax refund before bankruptcy

Can Creditors Grab Your Tax Refund? 

Part 2 of a 3 Part Series

by John G. Merna

Annual state and federal income tax refunds can be a large influx of cash.  For most people, these tax refunds  are the most cash they receive at once all year.  Your creditors know this.  They want to get it and start planning and mustering their forces to get it months in advance of tax time.  You need to begin preparing to protect it … immediately.

“How do they muster?”, you ask.  Well, if you have been behind and are an expert at evading creditors, but not smart enough to just file bankruptcy, you probably already know.  For those of you new to being behind on your bills.  Read carefully.  You have a lot to lose if they capture your tax refund.


“Can Debt Collectors Grab Your Tax Refund?” … Depends.  Most can’t get your tax refund directly from the government. Private creditor like credit cards companies,  banks, credit unions, and other consumer lenders cannot garnish your federal tax refund or state tax refund directly from the government.

Who can garnish the government to get your tax refund?   Government entities, including state federal and municipal government entities, have the right to “offset” for unpaid taxes, past due federal student loans, back child support, overpayment of social security and unemployment benefits, and a few less know obligations.  If there is an “offset” of your federal tax refund, you will receive a notice from the Internal Revenue Service (IRS) explaining the offset and your rights to challenge the offset action.

“Any protection at all from these “offsets?”, you ask.  Possibly if the offset comes out of a joint refund and one of the spouses is not obligated on the debt that is causing the offset.  The non-obligated spouse can file an “innocent spouse” claim.  The form to use is IRS form 8379.  In order for the offset not to occur in the first place, the claim needs to be submitted with the filed return.

So here is the rule about protection for your tax refund in a nut shell.  Your refund is safe while it is in the government hands, with the few exceptions mentioned above, but once it is in your bank account the “open season” sign has been posted for your creditors… so learn the debt collectors’ tricks below.


CREDITOR TRICK #1 – A Blizzard Of Harassing Calls. The creditors begin to heap on the pressure in the form of increased phone calls in February to try to get delinquent debtors to make payment on their debt.  Unfortunately, technology has been a double edged sword – great for communications and access to information – bad for communications and access to information.

That is right.  The invention of auto-dialing technology has given debt collectors the ability to call relentlessly night and day.  The only protection for creditors available to against this barrage of calls is the Fair Debt Collections Practices Act which restricts calls between the hours of 8 a.m. and 9 p.m. your local time.

CREDITOR TRICK #2 – Lying High pressure collectors will tell you during the blizzard of phone calls that they can get your tax refund from the government.  Not true.  They are saying this to stress you and increase the chance you will pay them something right now.  But they can get your tax refund money out of your bank by garnishing the bank once it is deposited.  (See below).   So even if they haven’t sued you and, therefore, can’t garnish you, they will lie that they can get the tax refund in order to coerce you into making a payment.

CREDITOR TRICK #3-  Garnishing Your Bank Account With Your Refund In It.  Debt collectors with judgments (creditors that have already sued you) know they have a greater chance of capturing a large chunk of tax refund money by taking the judgment and garnishing your bank account hopefully when your tax refund is in it.  So debt collectors and collection attorneys will prefer to garnish bank accounts over wages during tax refund season.  Locking up your bank account with a large chunk of money in it will recover money for them more quickly than garnishing wages (they can only garnish 25% of your wages).

CREDITOR TRICK #4 – Shortening The Garnishment Cycle.  The garnishment cycle is the time between when the garnishment starts and the hearing date to pick up the funds.  While wages and bank accounts can be garnished, the money can be recovered with the help of a great bankruptcy law firm (read “Merna Law”) all the necessary steps are done before the hearing date on the Garnishment Summons.  Generally, when a creditor sends out a garnishment it is about 90 days before the hearing date.  During tax time it is not unusual to see this drop to 30 days.  This means they want to get into your account and get the money in their hands as fast as possible so you don’t have time to react or stop them.  Contrary to popular belief, YOU WILL NOT GET NOTICE IN ADVANCE THAT A GARNISHMENT IS ABOUT TO OCCUR.  Lesson:  Move quickly if you have already been sued.

SPECIAL NOTE ABOUT MILITARY GARNISHMENTS OF TAX REFUNDS:  Government affiliated credit lenders such as the Navy Exchange Card (NEXCARD) and the Military Star Card (STAR CARD) have the same ability as the federal government to offset against your tax refund for unpaid debt.  So beware if you owe then.  However, this is where their pseudo-government powers end.  The debt owed to these lenders can be discharged in bankruptcy.

If you found this article information I would appreciate it if you would Goggle+1 the page at the top.  Thank you and please do not delay in contacting a bankruptcy attorney if you are behind more than 90 days on your debt.  We don’t want to see you lose that tax refund either.

See last week’s blog about how we can protect your refund if you opt to file bankruptcy by visiting this link: How To Protect Your Tax Refund – Part 1 of 3.

Protect Your Tax Refund

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