Tax Refunds and Bankruptcy

Legal Tips & Resources

With April just around the corner, and the filing deadline for taxes looming, many people are looking forward to receiving their anticipated income tax refunds. However, those individuals currently in bankruptcy or considering filing a bankruptcy petition should not yet make any plans for spending their refund checks. Whether you have filed a Chapter 7 or a Chapter 13 bankruptcy petition, it is not certain that you will be able to keep your refund amount.

While it may be the case that petitioners who have filed a Chapter 7 bankruptcy are more likely to keep their refunds than those who filed for Chapter 13 protection, it is never a guarantee. Factors that influence whether a petitioner can retain his or her refund, or whether it has to be forfeited to the trustee, include the timing of the filing of the bankruptcy petition and whether the petitioner took any steps beforehand to protect the potential refund.

Tax Refund in a Chapter 7

For those filing for Chapter 7 protection, their tax refund is considered an asset, whether they have already received it or not. Since Chapter 7 bankruptcies allows for certain assets to be exempt, a bankruptcy attorney can advise you if your tax refund can be listed as exempt in your filing, and, if so, in what amount.

If you have already received your refund before filing for bankruptcy and are unable to list the refund as exempt in your Chapter 7 petition, it is important to consult with your bankruptcy attorney as to what to do with your refund. You may want to consider postponing your filing and spending the refund on necessities or using it to pay your attorney fees so that it no longer can be considered an asset. They way in which you spend your refund matters in this case, so having an experienced attorney’s guidance on how to proceed is crucial.

If you have already filed your bankruptcy petition and are expecting a refund, you may still be able to avoid listing the refund as an asset in certain situations. It is advisable to consult with your bankruptcy attorney on the strategies of doing so in order to best improve your chances of keeping the refund.

Tax Refund in Chapter 13

Those who have filed for Chapter 13 protection and are currently in a bankruptcy plan will have to defer to the trustees of the plan to discover what portion, if any, of their refund they will be allowed to keep. Under Chapter 13, the refund will likely be considered disposable income and the trustee may choose to keep the entire refund, especially if the plan does not allow for the entire amount of debt to be paid back to creditors.

However, since the trustee has discretion in allowing you to keep your refund or not, there are certain circumstances under which you may be more likely to keep your refund, or at least a part of it. With the help of a bankruptcy lawyer, you may be able to show that special circumstances warrant you keeping your refund.