If you’ve decided that filing for bankruptcy is right for you, you might be wondering what will happen with your tax return. This article will discuss tax refunds and Chapter 7 bankruptcy.
Whether you lose your tax refund or are allowed to keep it in bankruptcy will largely depend on the timing of your bankruptcy and the refund itself. When you file for Chapter 7 bankruptcy, all of your assets are combined into what is referred to as the bankruptcy estate. This estate is controlled by the bankruptcy trustee. Your tax return is an asset, which means that the trustee can use any unspent money from the return. At your meeting of the creditors, the trustee will most likely ask you about your tax return, how much it is, if you still have it, and more.
Despite the fact that the trustee can use your assets to pay off creditors, you are allowed to keep any assets that you receive after you file for bankruptcy. If you plan ahead, this means that you can keep your tax refund in bankruptcy. You can take the following steps to protect your tax return from creditors:
- Including the tax return in your exemptions from bankruptcy. In some situations, it is not a good idea to exempt your tax return from bankruptcy. This will depend on how much of the tax return you have left over when you file for bankruptcy. You can only exempt a certain amount of property from bankruptcy, so it might not be worth exempting your tax return when you can exempt other assets. You should discuss your personal situation and what you should exempt from bankruptcy with a bankruptcy lawyer.
- Spending the tax return on expenses that are necessary, such as bills, groceries, mortgage payments car payments, clothing, medical care, education, etc. Keep in mind that if you spend the tax return on luxury expenses, or to repay a debt to a friend or one credit card company, this will not be counted as a necessity and this will not qualify you to keep your tax return.
- Changing your withholdings so that your refund is reduced to a minimal amount.
Unless you take these actions to protect your tax return, your tax return from the year that you file bankruptcy will go to your bankruptcy estate. The same will happen to tax refunds from the year before you filed for bankruptcy, if they have not been spent yet. You may keep the tax return from the year following your bankruptcy.
If you are interested in protecting the remainder of your tax return from bankruptcy, you should consult with a bankruptcy attorney about the best time to file for bankruptcy. I can assist you in this matter by reviewing your personal situation with you. To discuss your bankruptcy case, you can contact me here.