Bankruptcy And Tax Refunds: What Filers Should Know
Posted on: 7 June 2022
If you are in financial trouble, you might be looking forward to a tax refund. However, if you are also about to file for bankruptcy, that refund may or may not be in jeopardy. Read below and learn how the type of bankruptcy you file along with the timing of the filing can affect your tax refund.
Why Do Tax Refunds Matter?
Your income and assets are more important to the bankruptcy courts than you might realize. Your bankruptcy trustee, who is appointed to oversee your case, is required to locate any assets that could be used to offset certain administrative expenses of your filing. With that in mind, your trustee will scrutinize your bankruptcy documents including information about tax refunds to locate assets and target them for seizure.
Chapter 13 Filers
In most cases, tax refunds will be seized by the bankruptcy trustee when Chapter 13 is filed. However, it may be possible to convince the trustee that the money is needed to cover an unexpected financial obligation. For instance, if you had to move out of your home and need all the money you can pull together to pay for moving expenses, you may be able to keep your tax refund.
It should also be mentioned that if you anticipate a Chapter 13 filing in advance, consider changing your withholding on your Form W-4 so that you will have a little more take-home pay and fewer chances of a tax refund. This remedy also works if you are filing a Chapter 7 bankruptcy.
Chapter 7 Filers
Your chances of hanging on to your tax refund when you file Chapter 7 depends on the timing of the filing and your state's exemptions. In some cases, tax refunds are protected by an exemption, regardless of when you file for bankruptcy. However, the bankruptcy trustee does have the power to take your tax refund if you have already filed your taxes and are expecting a refund in the next few months. In most cases, the bankruptcy laws require that you file your taxes, if they are due, before filing for bankruptcy. In fact, at the creditor's meeting, the trustee will specifically ask you if you have filed your taxes and about any refunds.
However, if you are planning to file Chapter 7 in a few months, try to time it so that you receive any refunds before you file for bankruptcy. The trustee may still ask you about the refund, but they won't try to take it back if you can say you used it for non-frivolous purposes.
Talk to a bankruptcy lawyer for more information about tax refunds and bankruptcy.
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