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Can I Protect my Tax Refund in Bankruptcy?

On Behalf of | Apr 17, 2015 | Bankruptcy Basics

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. This blog will provide general guidance, but it is important to let us review your individual circumstances and determine the best strategy for you. For the most part, keeping your refund is not an issue in a Chapter 13 case because it is recalculated back into your estimated monthly income. Below are a few ways we can help you protect your tax refund in your bankruptcy filing:


Your tax refund is like any other asset in your bankruptcy filing, so you may be able to claim exemptions in order to keep all or a portion of your tax refund. The exemptions differ from state to state. If your entire refund is covered by an applicable exemption (and the trustee agrees), you will be allowed to keep the refund and use it however you wish. Most debtors are informed at the meeting of creditors if the trustee agrees the refund is exempt.

Small Tax Refunds

If you are expecting a relatively small tax refund (a few hundred dollars or so, depending on the individual trustee and the local practices), the trustee may decide to let you keep it. Similarly, if a portion of your refund is exempt and only a small amount is not exempt, the trustee may simply decide to let you keep the non-exempt part of the refund too.

Why would the trustee do this? In most cases, the trustee waives the right to a small tax refund because he or she has determined that the refund would not be sufficient for a “meaningful distribution” to your creditors. In other words, by the time the trustee’s fees are paid for his or her services in seizing the refund and dividing it among the creditors, the creditors would receive such a small amount that it would not be worth the effort.

Appropriate Spending of Tax Refund

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 your tax refund is no longer your asset, you don’t have to worry about whether it is exempt or not.

It is important to note that you must have spent your tax refund appropriately. The bankruptcy trustee will investigate any financial transactions (including how your refund was spent) just prior to your bankruptcy filing. Before you spend your tax refund, it is important to confer with us.

If you have questions regarding your tax refund and filing for bankruptcy protection, let us help.

We are bankruptcy lawyers who know how to make a difference in your financial situation. We have experience you can rely on and we care about your results. Contact our New Jersey law firm online by filling out the form or by calling 973-323-2953 to schedule a free initial consultation with an attorney at Levitt & Slafkes, P.C..