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Losing Tax Refunds When in Debt

When you’re in debt, a tax refund gives your finances a needed boost. People often plan to pay important expenses with this money, such as a mortgage or utilities. That’s why losing tax refunds when in debt can come as such an unpleasant surprise. Sadly, this is a reality too many people face when in over their heads in certain kinds of debt.

Because the government, through the IRS, issues your tax refund, most creditors do not have access to this money directly. Money owed due to credit card debt, mortgages, car loans, medical or educational debt, and other unsecured or secured personal loans cannot be recovered by creditors by garnishing your tax return directly. You will be issued a check, allowing you to decide how payments should be made with that money. What few people realize, though, is that debts you own to the federal or state government can be taken directly out of your tax refund through withholding or garnishing the total that you would have received back.

Tax Refunds Taken Due to Governmental Student Loan Default

Most people, of course, don’t believe they owe much money to the government, but these debts are more common than you may think. Since the IRS is issuing the refund, any back taxes you owe will be taken out first. You also could owe a court settlement or child support payments. The most common garnishment, however, is due to defaulted student loans issued by the government—which is also the one that surprises people the most. Because the Department of Education issues Stafford loans and other student loans, these debts are considered debts to the federal government. Your refund can be withheld to pay these debts.

Unfortunately, such garnishments, called tax refund intercepts by the IRS, are difficult to contest. A hearing can be held to formally protest the garnishment, but the money will only be released to you if you can prove that your debt was not in default. You may also be able to recover the money if you filed your taxes jointly with a spouse, and it was his or her student loan that is actually in default. In most cases, people simply give up on recovering the refund and focus on having less money withheld during the next tax year.

Whether you get such money returned or not depends largely on the unique circumstances of your case. An Ohio consumer protection lawyer will be best able to advise you on your chances. Even if you aren’t able to recover your tax refund, there are options that will allow you to get your finances back on track. Call the Ohio bankruptcy attorneys at Cleveland Bankruptcy Attorneys today at (216) 586-6600 today to find out how we can help you get control of your finances and your life once more.

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