As we enter tax season the question of, “what happens to my tax refund if I file bankruptcy” always comes up. This is a common question as many people are looking forward to receiving their tax refund but are also considering bankruptcy as a way to get a fresh start.
So, can you keep your tax refund if you file bankruptcy? This blog will provide some general answers, but since everybody’s situation is different, it is important that you speak to an experienced bankruptcy attorney to determine the best strategy for you.
What Happens to a Tax Refund in a Chapter 7 Bankruptcy?
On the day your bankruptcy is filed, any assets that you own become part of what is called the “bankruptcy estate”. Your tax refund, whether you already received it or not, is considered an asset. With careful planning, however, most people that file a no asset Chapter 7 bankruptcy can keep their tax refund.
How to Keep Your Tax Refund in a Chapter 7 Bankruptcy
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Adjust Your Withholding to Reduce the Tax Refund.
If you do not have to file your bankruptcy immediately, adjust your withholding to reduce your refund to a small amount
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Use exemptions to protect your refund.
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. You could then use it however you want.
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Appropriately Spend Your Tax Refund Before You File.
When you file bankruptcy, your assets include only those that legally belong to you on the date the bankruptcy petition is filed. If you have already received your tax refund and spent it appropriately before your bankruptcy is filed, the money is no longer an asset.
If you choose to do this, spend your refund on what is called necessities.
These include:
- mortgage payment, rent
- utilities
- food
- car payments
- medical expenses
- attorney’s fees for filing your bankruptcy
Do not buy new assets with the refund and be sure to keep track of how you spend the refund, including keeping receipts.
Do Not Do the Following with Your Tax Refund:
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Do Not Buy Luxury Goods
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Do Not Pay Back Family Members or Friends.
If you pay back a family member or a friend for loans they have given you, the bankruptcy trustee could try to get the money back as a preference.
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Do Not Pay a Large Sum to a Creditor.
That includes not paying towards a credit card balance.
What Happens to Your Tax Refund in a Chapter 13 Bankruptcy?
When you file a Chapter 13 you must pay all the “disposable income” you get during a Chapter 13 Bankruptcy into your Chapter 13 Plan. You will probably want to adjust your withholding before you file Chapter 13 to minimize your tax refund.
CONTACT US TO FIND OUT HOW YOU CAN KEEP YOUR TAX REFUND IN BANKRUPTCY
It’s important to remember that everyone’s situation is different. If you are considering filing for bankruptcy and want to understand what happens with your tax refund, contact the experienced bankruptcy attorneys at Levitt & Slafkes, P.C. to find out.
Contact us at 973-323-2953 to schedule a free consultation 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. The information on this website and blogs is for general information purposes only. Nothing should be taken as legal advice for any individual case or situation.