A Creditor Intercepted My State of Michigan Income Tax Refund. What Do I Do Now?
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Finding out that your Michigan income tax refund has been intercepted by a judgment creditor can be frustrating and confusing — especially if you have already filed bankruptcy or are in the process of doing so. Fortunately, in many cases, the situation can still be corrected.
How Did This Happen?
In Michigan, a judgment creditor can apply to levy or garnish a state income tax refund after obtaining a court judgment against you. Typically, creditors submit these requests to the State of Michigan during the fall — usually in October or November of the previous year — so the levy is already in place before tax season begins. Sometime after you file your income tax returns, you will receive a letter from the State of Michigan Department of Treasury titled Notice of Income Tax Refund Used for Debts
By the time you file your tax return, the State may already have instructions to send your refund directly to the judgment creditor.
What Happens If I File Bankruptcy?
Once you file bankruptcy, the Automatic Stay goes into effect immediately. The Automatic Stay is a federal court order that stops most collection activity, including garnishments and tax refund levies.
After receiving notice of the bankruptcy filing, the judgment creditor will usually do the right thing and file a Garnishment Release with the State of Michigan. That release tells the State not to send the refund money to the creditor.
Unfortunately, that does not always solve the problem right away.
Why Did the State Still Send the Money?
The Michigan Department of Treasury processes thousands of tax refund intercepts every year. Because of administrative backlogs and processing delays, the State may still send the refund to the judgment creditor even after the Garnishment Release has been filed.
This is more common than most people realize.
In many situations, the creditor has already released the garnishment, but the State simply did not process the release in time before issuing payment.
What Happens to the Money Then?
If the judgment creditor receives your tax refund after your bankruptcy filing, they generally cannot keep the money.
Typically, one of two things happens:
- The creditor sends the money back to the State of Michigan; or
- The creditor forwards the funds to your bankruptcy attorney so the money can be returned to you properly.
While this process can take time, it is usually an administrative issue rather than intentional wrongdoing by the creditor.
What Should You Do?
If your Michigan tax refund was intercepted after filing bankruptcy, you should:
- Contact your bankruptcy attorney immediately;
- Provide copies of any notices from the State or the creditor to your attorney;
- Confirm that the creditor received notice of your bankruptcy filing; and
- Avoid assuming the money is permanently lost.
Your attorney can follow up with the creditor and, if necessary, the State of Michigan to help track the funds and ensure compliance with the bankruptcy stay.
The Good News
In many cases, these intercepted refunds are eventually returned to the debtor. The delay is often caused by timing and State processing issues — not because the creditor is entitled to keep the money after bankruptcy has been filed.
