Tax Refunds and Chapter 7 Bankruptcy

Tax season is right around the corner. For some of us, this means receiving a tax refund that is sure to provide some financial relief. For others, an air of uncertainty abounds as they prepare to file their taxes and file for Chapter 7 bankruptcy. If you are in this second group, you are undoubtedly wondering, “Will I be able to keep my tax refund despite my looming bankruptcy?” After all, Chapter 7 bankruptcy is all about paying off as much of your debt as possible and then dropping the rest. So will you be able to keep it when the dust settles? The answer is a certified maybe.

It boils down to the details, specifically to when you file for bankruptcy and when you receive your tax refund:

• If you file for Chapter 7 and your last tax refund was a year ago, that money is more than likely going to wind up in your bankruptcy estate, or what creditors are allowed to get their hands on as your bankruptcy advances.
• If you file for Chapter 7 the year of your tax refund, it could be split up between you and the bankruptcy estate. Money you earned before filing will go to creditors and money you earned after the date of filing – there is no such thing as an instant bankruptcy case – will go to you.
• If you file for Chapter 7 and your next tax refund comes a year later, the entire refund should be yours to keep. Your successful bankruptcy should allow you to step away from your debt and start anew, and thus, there are no creditors left to take your refund.

Tax Planning and Bankruptcy Filing

You are the only person in control of when you file for bankruptcy and, in a way, when you file your taxes and receive a refund. If you plan ahead to coordinate your two separate filings, you can increase your chances of holding onto your tax refund.

Consider these options to keep as much for yourself as possible:

1. Exempt: Based on the size of your estate and where you live, you may be able to keep a certain dollar sum exempt from creditor payments. If your estate is somewhat small and so is your tax refund, it can probably be considered outright exempt, regardless of when you file.
2. Withholding adjustment: You do not need to get all of your tax refund in one lump sum. You can instead adjust the amount you wish to withhold and only pay what you owe at the time of filing. This can stagger your tax refund amount to future paychecks, allowing you to collect some or most of it after you file for bankruptcy.
3. Expenditures: Even the meanest-looking Chapter 7 bankruptcies should not strip you of your right to necessary expenditures. If you get your tax refund but still need to file for bankruptcy in the near future, spend it! Reminder: you need to spend it on necessary things, such as mortgages, rent, utilities, food and clothing, and medical care. Do not go out and buy a new television, for example. Not only will that likely be snatched up by creditors but it could flag you for fraud.

Preparing your taxes or a bankruptcy filing can be hard work all on its own. When the two combine or come up around the same time, the stress may feel multiplicative or exponential. Let our Fort Worth bankruptcy attorneys from The Pritchard Law Firm take that load off your shoulders by retaining our professional services that are backed by 45+ years of collective experience and happy client testimonials. Why not contact us today for information about your case? We offer complimentary initial case evaluations so you have nothing to risk but much to gain.