What Happens To Tax Refunds In Bankruptcy?

Are you considering filing for bankruptcy? If you’re filing for Chapter 7 or Chapter 13 bankruptcy and you’re expecting a large tax return, you may want to hold off depending on the state you live in.

Tax Refunds As Assets In Bankruptcy

If your tax refund goes directly into your bank account or it’s being processed, you’ll need to file it as an asset. You can expect the bankruptcy trustee to ask what you’ve received on your return. With any type of asset, when you file for bankruptcy it may not be protected under a bankruptcy exemption. With the banning of the state where you live, you may be able to protect part of your tax return as part of a wild-card exemption. A wild-card exemption will allow you to protect an asset of your choice up to a specific dollar amount. The federal wild-card exemption is usually larger than state wild-card exemptions and with proper planning, you can hold onto more of your tax refund assets with this exemption.

Filing For Chapter 7 Bankruptcy During Tax Season

If you filed for Chapter 7 backup during tax season, you can use part of the wild-card exemption for your tax refund to protect it. The best course of action is to file for bankruptcy after receiving and spending your tax refund. If you’re going to spend part of your tax refund it is usually best to keep your spending on essentials like your mortgage, medical expenses, clothing, or food and not to purchase new assets as these will likely be sold to pay your debts.

Filing For Chapter 13 With A Tax Refund

Under a Chapter 13 bankruptcy, you’ll have some protection over your tax refund if you label it under the wild-card exemption, during your 3 to 5-year repayment plan you’ll be responsible for contributing your disposable income to your Chapter 13 plan. If you have a significant tax refund this can adjust your payments and what may be owed to your creditors. In most cases, under Chapter 13 your trustee will not require you to contribute a tax refund as part of your plan. What is important under the Chapter 13 bankruptcy proceeding is that you are going to record your tax refund as income. Any attempt to hide bankruptcy income owed to your creditors may risk your repayment plan and any assistance you are receiving in your repayment.

This post was written by Trey Wright, one of the best bankruptcy lawyers in Tallahassee FL! Trey is one of the founding partners of Bruner Wright, P.A. Attorneys at Law, which specializes in areas related to bankruptcy law, estate planning, and business litigation.

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