Garnishments of State Income Tax Returns – Don’t Lose Them to Your Creditors!

With tax time quickly approaching, now is the time when creditors are trying to attach a writ of garnishment against state income tax refunds. Most people count on their tax refund to supplement their budget and living expenses, so losing that money can create budget mayhem!

The Michigan Department of Treasury can withhold income tax returns for payment of certain debts, such as:

• Probate or child support orders;
• Overpayment of unemployment benefits;
• Delinquent taxes;
• State agency debts;
• Garnishments;
• IRS levies on individual income tax refunds.

By state law, the Michigan Department of Treasury is authorized to offset your income tax refund or credit to apply to unpaid past-due taxes or state agency debts until the debt is paid in full.

In terms of garnishments, the Third Party Withholding Unit of the Michigan Department of Treasury receives and processes garnishments and is required to provide notice to the taxpayer before withholding individual income tax refunds or credit for payment of debt. If you receive one of these notices, time is of the essence to stop this garnishment before it occurs.

Filing Bankruptcy to Stop a Garnishment of State Tax Refund - Timing is Key!

Unlike most other garnishments, once the state tax refund has been provided to a creditor we are not able to recover the funds back for you under a "bankruptcy preference action." What does this mean? File a bankruptcy before you file your taxes! Here is the suggested timing:

• File a Chapter 7 or Chapter 13 Bankruptcy before you file your State income tax returns;
  • If you need to file your Federal taxes to pay for legal fees, you can safely do that at any time unless you are concerned about past IRS debt that may legally be garnished along with other federal or other related government obligations. These debts may be better handled in bankruptcy. We will advise you on this at the time of the free consultation. If this is the case for you, we suggest you schedule a free office appointment prior to filing any tax returns.
• Next step after the bankruptcy has been filed, contact the garnishing creditor to request a release of garnishment. A writ of garnishment served against your State Income Tax refund is a lien interest. Filing a Chapter 7 Bankruptcy will eliminate the underlying debt (absent an exclusion for the debt, i.e. alimony, maintenance, support, student loans, etc.), but it does not automatically remove the lien interest. This release (removal of the lien interest) must be verified before filing your tax return. If the lien is not removed prior to filing your State return the lien on your taxes is still valid despite your bankruptcy (meaning, the creditor gets to keep the refund).
• Final step (after the filing of the Bankruptcy and the lien is removed), file your State of Michigan income tax returns! Tax refunds can typically be protected under bankruptcy code exemptions.

Chapter 7 Bankruptcy to Eliminate Debt

By filing a Chapter 7 bankruptcy prior to filing your State of Michigan Income tax return you can eliminate the underlying debt that you are being garnished for as well as other unsecured debt obligations such as credit cards, medical bills, personal loans, loan deficiency debt, etc. Certain debts are non-dischargeable, such as student loans, water bills, secured debts (such as a current mortgage or vehicle that you wish to keep).

Chapter 13 Bankruptcy to Consolidate Debt

Simply put, a Chapter 13 reorganization program is a court authorized debt consolidation program. It has many powerful and unique tools, such as:

• Foreclosure protection;
• Stop vehicle repossession;
• 0% interest repayment to unsecured creditors, often at a reduced rate;
• Flexibility to change the terms of the plan as your circumstances change.

Other Garnishments and Preference Actions

Other garnishment actions, against wages and bank accounts, can be stopped with the filing of a bankruptcy as well. If a single creditor has taken over $600 within 90 days of your bankruptcy filing, we can demand the funds back under a "preference action." For more information, visit our detailed page on stopping garnishments.

Experience counts!

Acclaim Legal Services has been in business for over 15 years and has helped over 14,000 Michigan residents find debt resolution and financial freedom. Call us today for a free consultation.

We have seven convenient office locations: Ann Arbor, Flint, Dearborn, Southfield, Warren, Lansing and Downtown Detroit. Call today for a free consultation with a licensed Michigan attorney at 866-261-8282.