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This question comes up every tax season.  You’re looking forward to receiving a tax refund check and you also want to get your bankruptcy case filed.  So, what happens to your tax refund in a bankruptcy case?
If you are planning to file a personal bankruptcy and you are expecting a tax refund, it is essential that you confer with us as soon as possible to make certain your refund is protected.  This blog will provide general guidance, but it is important that we review your individual circumstances and determine the best strategy for you.

YOUR TAX REFUND IN A CHAPTER 7 BANKRUPTCY

On the day the bankruptcy is filed, any assets that you own become part of the “bankruptcy estate” Your tax refund, whether already received or expected for that year is considered an asset.

Here Are Some Options to Keep Your Tax Refund:

With some careful planning you have a better chance of keeping your tax refund in a Chapter 7 Bankruptcy.

  • Using exemptions. Your tax refund is like any other asset in your bankruptcy filing so you may be able to claim an exemption to keep all or a portion of your tax refund.
  • Appropriately Spend Your Refund Before You File. A bankruptcy filing includes only the assets that legally belong to you on the date your petition is filed.  Thus, if you receive your tax refund and spend it appropriately before you file your bankruptcy case, the funds are no longer yours.  If you choose to do this, be sure to spend your refund on necessities (such as your mortgage or rent, medical expenses, clothing, food, car payments, attorneys fees for your bankruptcy) and not to buy new assets. You should keep track of how you spend the refund.

You’ll want to avoid paying money to a family member or friend because the bankruptcy trustee could try to get the money back as a preference.  The same applies to paying a significant sum to a creditor, such as for a credit card balance. Again, you’ll want to make sure to keep good records, including receipts, documenting how you spent the money.

YOUR TAX REFUND IN A CHAPTER 13 BANKRUPTCY

The bankruptcy code requires that you pay all disposable income received during a Chapter 13 Bankruptcy into the plan. Most Chapter 13 trustees treat a tax refund received during your case as extra disposable income. Therefore, you’ll likely want to adjust your withholding before you file your case to minimize your refund.

CONTACT US TO FIND OUT HOW YOU CAN KEEP YOUR REFUND IN BANKRUPTCY

It’s important to remember that everyone’s situation is different.  If you are considering filing for bankruptcy and are unsure of how your tax refund will be treated contact the experienced attorneys at Levitt & Slafkes, P.C. to find out. Contact us at (973) 323-2953 to schedule an appointment, or contact us online.

We are proudly designated as a debt relief agency by an Act of Congress.  We have proudly assisted consumers in filing for Bankruptcy Relief for over 30 years.