Can I Stop Student Loan Creditors from Taking My Tax Refund?

Can I Stop Student Loan Creditors from Taking My Tax Refund?
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Last updated: February 2013

The following question was submitted to John Roska, an attorney/writer whose weekly newspaper column, "Q&A: The Law," runs in the St. Louis Post-Dispatch (Illinois Edition) and the Champaign News Gazette.

Question:

I know that it is possible to stop creditors from making you use your tax refund to repay debts. Can that be done with a student loan debt? Every year, my tax refund is taken to pay off an old student loan, and it would be helpful if I could stop that and use my refund to pay bills.

Answer:

Unfortunately, you can only stop "regular" creditors from taking your tax refund to repay debts. This does not apply when the creditor is the state or federal government, however. Those creditors get special privileges, and can take your refund.

Debtors can protect tax refunds by using laws that make certain property and income "exempt." Exempt property cannot be touched by creditors to repay a debt. These exemption laws are designed to leave debtors with something to live on. Even if you have had court judgments entered against you, creditors cannot take exempt property, or make you pay out of exempt income.

The "wild card" exemption protects $4,000 worth of anything you choose. That could be TVs, money, jewelry—anything. By itself, the wild card exemption will save many tax refunds.

Another exemption protects public assistance benefits. Several judges have said that the Earned Income Tax Credit (EITC) is a public assistance benefit, so that any part of a tax refund coming from the EITC is exempt.

If part of a tax refund is not due to the EITC, and therefore not exempt, it could still be protected using the wild card exemption. Combining, or "stacking," those two different exemptions will completely protect most tax refunds.

However, exemption laws either don’t apply at all when the debt collector is the federal or a state government, or don’t apply as much as they do for other types of debt. That is because the federal and state governments are not "regular" creditors. The federal and state governments get special rights that help them get paid.

One special right the federal and state governments have is the right to intercept tax refunds. So, while your tax refund cannot be taken to repay banks or doctors ("regular" creditors), it can be taken to repay student loans, the IRS, or overpaid unemployment benefits.

Federal tax refunds can be taken first for unpaid child support, then for debts owed to federal agencies (like to the Department of Education for student loans), to the IRS for back taxes, or to Social Security for benefit overpayments. After those debts get paid, your federal refund can also be intercepted for unpaid state taxes.

Illinois tax refunds can be taken first for unpaid Illinois taxes, then for back child support, then for debts owed to Illinois agencies, then for unpaid federal taxes, then for unpaid taxes due other states, and finally, for unpaid Circuit Clerk fees (probably the $36 annual fee child support payors are supposed to pay).

To reduce tax hits, you may be able to adjust your withholding to reduce what is withheld, and what gets intercepted as a refund. It is also possible for employers to pay the EITC during the year, as part of your regular paycheck.

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