Tax returns are an important source of income and are relied on by many, especially during lean financial times. If you’re counting on your tax return to cover an unexpected expense, bills, or to pay a specific debt, you want to make sure it’s protected. The bank is able to use your entire tax refund if necessary to pay off certain debts. Unfortunately, their priorities and yours might not line up. This means if you’re not careful, you might not end up seeing any of your tax refund money or be able to direct it to the high priority places it needs to be.
This is done through setoff clauses that are often written into the contract when you open an account with a financial institution. Most banks will have a setoff clause to pay debts such as:
- Past Due Credit Lines
- Past Due Loans
- Past Due Credit Cards
- Other obligations from that institution
In a nutshell, this means that you have authorized your bank to take the refund money from your accounts to pay debts you have with them. While there is no way to get around paying those debts indefinitely, it is understandable that there might be more pressing financial matters to attend to.
Can I Stop a Bank Setoff?
Especially when going through hard financial times, every potential income source is critical. The bank is aware of the debts you hold with it, but they may not be mindful of more pressing debts that you need to prioritize.
The most important thing to do is to stay calm and know that you have options. The best thing you can do is be proactive and try to avoid a bank setoff entirely. Once the refund has been taken to pay a debt, it’s not going to be returned.
Pay Down Debt
The most obvious answer to avoid a bank offset is to get current on your debts with the institution your refund will be going to. If your refund comes to one bank that you have debt with and you have another account with a different institution, prioritize paying the one receiving the tax refund before it comes.
Open a New Account
Unfortunately for most, the notion of just paying off debt is a lot easier said than done. If paying down the debt isn’t an immediate option, open a new bank account with another institution.
If you open an account with a bank you have no credit history with, they won’t have any reason to offset your return. You’ll need to make sure you change your deposit information to your new account, but otherwise, the return should be safe. Keep in mind this will not make the debt with your old bank go away, but it will give you some time to get your finances in order.
Filing bankruptcy is another way to protect your tax return. When you file for bankruptcy, it pauses all collections. While this automatic hold is in place, no debts can be collected from you for the duration of your bankruptcy. This extends to bank setoffs as well.
With this in mind, it is important to know that declaring bankruptcy can have other implications for your holdings, tax refund, and credit. You should talk with a bankruptcy attorney to determine if this option is the best for you.
At Cherney Law, we take pride in assisting and representing fellow Atlantans dealing with financial struggles and debt. We have over 15 years of experience, and we know that the crippling stress of severe debt can be overwhelming. We provide the legal service and expertise to guide you through the situation and make life a little easier.