One of the questions we frequently receive from bankruptcy clients involves state income tax refunds that have been intercepted by the State of Michigan before or shortly after a bankruptcy case is filed.

If you are expecting a Michigan state income tax refund and a judgment creditor previously obtained a state court judgment against you, the creditor may have filed a request with the State of Michigan to levy or intercept your refund. When that happens, the State may hold the refund funds pending payment to the creditor.

Fortunately, the filing of a bankruptcy case generally stops collection activity through the protection of the automatic stay. Once a creditor learns of the bankruptcy filing, collection efforts must cease.

What Happens After the Bankruptcy Is Filed?

In many cases, the creditor’s attorney will promptly send a Release of Garnishment or similar notice to the Michigan Department of Treasury’s Third Party Withholding Unit after receiving notice of the bankruptcy filing. This release instructs the State that the creditor is no longer attempting to collect the debt through the tax refund levy.

However, even after the release is sent, the process is not always immediate. Government agencies often require time to process the release, update their records, and return the funds.

As a result, debtors should understand that there can be a delay between the bankruptcy filing and the actual return of the refund money.

Why Hasn’t My Refund Been Returned Yet?

Many debtors become concerned when they learn that the State of Michigan is still holding their refund weeks after the bankruptcy case has been filed. In most situations, this delay is simply administrative.

The Third Party Withholding Unit processes a large volume of levies, releases, and refund requests. Even after a release is received, it may take time for the agency to determine whether the funds should be returned directly to the taxpayer.

Patience is often required while the State completes its review and processing procedures.

What If the State Sends the Money to the Creditor Anyway?

Another common scenario occurs when the State receives the creditor’s release but nevertheless forwards the refund funds to the creditor’s attorney.

While this can be alarming, it is not unusual. Sometimes the State’s processing of the levy and the release overlap, causing the payment to be issued despite the creditor’s request to stop collection.

When this happens, the creditor’s attorney will usually recognize that the bankruptcy filing prevents collection of the debt and will refund the money. In many cases, the attorney sends the funds back voluntarily once the issue is brought to their attention.

Although this may create an additional delay, it does not necessarily mean that the refund has been permanently lost.

What Should Debtors Do?

If your Michigan state income tax refund has been intercepted because of a judgment creditor levy and you have filed bankruptcy:

• Make sure your bankruptcy attorney is aware of the levy.
• Confirm that the creditor and the creditor’s attorney have received notice of the bankruptcy filing.
• Understand that the creditor’s attorney has likely already sent a release to the State’s Third Party Withholding Unit.
• Expect that processing delays may occur before the refund is returned.
• If the State mistakenly sends the funds to the creditor’s attorney, the funds are often refunded after the issue is identified.

Every case is different, and the timing can vary depending on the State’s processing procedures and the specific circumstances of the levy. If you have questions about a tax refund levy during your bankruptcy case, you should consult with an experienced bankruptcy attorney who can review the status of the refund and communicate with the appropriate parties on your behalf.

Disclaimer: This article is intended for general informational purposes only and does not constitute legal advice. Bankruptcy laws and collection procedures vary based on individual circumstances. Consult with a qualified Michigan bankruptcy attorney regarding your specific situation.