As tax season approaches, we are often asked “can I keep my tax refund if I file a Chapter 7 Bankruptcy?” This blog will provide a general answer to this question. It is important, however, to consult a bankruptcy attorney to determine the best strategy for your situation.
What Happens to My Tax Refund in a Chapter 7 Bankruptcy?
As soon as you file bankruptcy, any assets that you own become part of what is called the “bankruptcy estate”. Your tax refund, whether or not you already received it, is considered an asset. With careful planning, however, most people that don’t have many assets can keep their tax refund when they file a Chapter 7 Bankruptcy.
How Can I Keep My Tax Refund in a Chapter 7 Bankruptcy?
Adjust Your Withholding to Reduce the Tax Refund
If you don’t need to immediately file a Chapter 7 bankruptcy, you can adjust your tax withholding to reduce your refund to a small amount. Just be careful not to adjust it in such a way that you wind up owing a large amount of taxes.
Use Exemptions to Keep Your Refund
Your tax refund is like any other asset in your bankruptcy filing so you may be able to claim an exemption in your Chapter 7 to keep all or a portion of your tax refund. You could then use it however you want or need.
Appropriately Spend Your Tax Refund Before You File Chapter 7 Bankruptcy
When you file Chapter 7 bankruptcy, your assets include only assets belonging to you on the date your bankruptcy petition is filed. If you have already received your tax refund and appropriately spent it before filing bankruptcy, the refund money is no longer an asset.
If you choose to spend your refund prior to filing, be sure to spend it on what are called necessities.
These include:
• mortgage payment
• rent
• utilities
• food
• car payments
• medical expenses
• attorney’s fees for filing your bankruptcy
Do not use the refund to buy new assets. Be sure to keep track of how you spent the refund, including keeping receipts.
Do Not Do the Following with Your Tax Refund Before Filing Bankruptcy
• Do Not Buy Luxury Goods
• 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.
• Do Not Pay a Large Sum to a Creditor
That includes not paying towards a credit card balance.
CONTACT LEVITT & SLAFKES TO FIND OUT HOW YOU CAN KEEP YOUR TAX REFUND IN A CHAPTER 7 BANKRUPTCY
It’s important to remember that everyone’s situation is different. If you are considering filing for Chapter 7 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.