Ready to say goodbye to student loan debt for good? Learn More
X

Timing Considerations If Student Loan Company Takes Your Tax Refund

2 minute read Upsolve is a nonprofit that helps you get out of debt with education and free debt relief tools, like our bankruptcy filing tool. Think TurboTax for bankruptcy. Get free education, customer support, and community. Featured in Forbes 4x and funded by institutions like Harvard University so we'll never ask you for a credit card.  Explore our free tool


In a Nutshell

There are not many creditors that can withhold, or set off, your tax refund before it ever hits your bank account. The most common instance of this is when the IRS keeps your refund and applies it to a prior year's balance owed. But that's not the only time this can happen. Another reason for the federal government to withhold all or a portion of your tax refund is if you're in default with federal student loans. Since student loans aren't automatically discharged in bankruptcy, this can be a blessing in disguise. However, timing matters, and depending on when your tax refund was taken by the government, you may be better off waiting a bit to file your bankruptcy case.

Written by Attorney Andrea Wimmer
Updated September 3, 2020


There are not many creditors that can withhold, or set off, your tax refund before it ever hits your bank account. The most common instance of this is when the IRS keeps your refund and applies it to a prior year's balance owed. But that's not the only time this can happen.

Another reason for the federal government to withhold all or a portion of your tax refund is if you're in default with federal student loans.

Since student loans aren't automatically discharged in bankruptcy, this can be a blessing in disguise. However, timing matters, and depending on when your tax refund was taken by the government, you may be better off waiting a bit to file your bankruptcy case.

Treating creditors fairly

One of the trustee's responsibilities in a Chapter 7 bankruptcy is to make sure that all creditors are treated fairly. Generally, this means that the trustee has to make sure each unsecured creditor gets a share of the money that the trustee is paying to creditors.

This is also why the trustee has the power to undo payments of more than $600 made to creditors in the 90 days before the case was filed with the court. This is true whether the payment was voluntary or due to a garnishment, set off, or bank levy.

The Bankruptcy Code includes this provision to level the playing field. Filers can't "prefer" one creditor over another and creditors know that racing to the courthouse to collect as much as possible from someone before their bankruptcy case can be filed is a fruitless effort.

Getting the most out of your fresh start

Generally, it doesn't impact the filer when the trustee avoids such a "preferential payment" to distribute the funds to all creditors. At this point, the filer is well on their track to discharge and typically doesn’t care who gets how much from the trustee.

Here's where student loans are (once again) just a little different. Since it's very hard to discharge student loans in bankruptcy, most Chapter 7 bankruptcy filers still owe their student loans even after getting their discharge.

Let’s look at an example of how timing can make a difference after a refund is taken to pay down student loans:

Debbie was supposed to get a tax refund of $5,000 from the IRS but the Department of Education intercepted her refund and applied the full amount to her student loan. This brings her student loan balance down from $7,000 to $2,000 owed. 

Scenario 1

Debbie files bankruptcy less than 90 days later. This gives the trustee the ability to get the $5,000 back from the Department of Education and pay every creditor a portion of it. Debbie's student loan balance goes back to almost $7,000 and she continues to owe this money even after her discharge is entered.

Scenario 2

Debbie files bankruptcy more than 90 days after the Department of Education takes her refund. This means the trustee can't undo the taking of the tax refund. After her discharge is entered, Debbie's only remaining debt is the $2,000 owed on her student loans. 

Upsolve Member Experiences

1,516+ Members Online
Tina Ewell
Tina Ewell
★★★★★ 3 minutes ago
Easy and so helpfully. I was nervous I would messed something up. But it's step by step!
Read more Google reviews ⇾
Cassandra Rhea
Cassandra Rhea
★★★★★ 3 minutes ago
Wonderful program. Very quick, very helpful, very amazing people and I am so lucky they were available to help me
Read more Google reviews ⇾
Alden Stewart
Alden Stewart
★★★★★ 1 day ago
Very easy to navigate
Read more Google reviews ⇾

When should I file? 

Unfortunately, the answer to that question depends. Sometimes it’s important to file a case before a certain date to stop a foreclosure, repossession, or garnishment that’s about to start. Other times, there’s no hard deadline to file. It’s up to each individual filer to determine what is best for them when it comes to timing, especially since the protections of the automatic stay don’t start until the case is filed with the court. 

Those who have the ability to wait with their bankruptcy filing often choose to wait until 91 days have passed from the date that their tax refund was taken by their student loan lender. While this means they’ve lost their tax refund for good, it also means that 100% of that tax refund goes towards paying down their non-dischargeable student loan debt. 



Written By:

Attorney Andrea Wimmer

TwitterLinkedIn

Andrea practiced exclusively as a bankruptcy attorney in consumer Chapter 7 and Chapter 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team as Managing Editor. While in private practice, Andrea handled... read more about Attorney Andrea Wimmer

It's easy to get debt help

Choose one of the options below to get assistance with your debt:

We can help you ask to get your student loans erased

If you qualify, Upsolve can help you file bankruptcy and ask to get rid of your student loan debt.

Check Eligibility
15,267 families have filed with Upsolve! ☆
or

Private Attorney

Get a free evaluation from an independent law firm.

Find Attorney

Learning Center

Research and understand your options with our articles and guides.

Go to Learning Center →

Already an Upsolve user?

Read Support Articles →
Y-Combinator

Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families resolve their debt and fix their credit using free software tools. Our team includes debt experts and engineers who care deeply about making the financial system accessible to everyone. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations.

To learn more, read why we started Upsolve in 2016, our reviews from past users, and our press coverage from places like the New York Times and Wall Street Journal.