Keeping Your Tax Return After Filing for Bankruptcy

The Internal Revenue Service (IRS) is pretty notorious all around the United States for trying to get their hands into everyone’s finances, but once a year they can actually give back, to some extent. By filing your tax return correctly, you could wind up collecting decent money from the IRS – just try to ignore the fact that they took so much more first. But what if you are losing an uphill financial battle and considering filing for bankruptcy around the same time you need to file your taxes? Will you be able to keep that tax refund?

Chapter 7, Chapter 13, and Your Tax Refund

From the get-go, there are some ways you can legally protect your tax refund from being collected during bankruptcy, namely using legal exemptions. This was recently covered in another one of our bankruptcy blog entries (Should I File Income Taxes Before or After Bankruptcy?) so be sure to give that one a read as well if you think exemptions will work for you. For these situations, let us assume you did not qualify for any exemptions. What can you do?

If you are filing for Chapter 13 bankruptcy, your creditors are more likely to be able to snag your tax refund. This is due to the fact that your Chapter 13 bankruptcy plan hinges on your agreement and obligation to do as much as you can to pay off your debt, or some of it, over the next few years. The tax return is considered disposable income since you didn’t know how much you were going to get back from them, if any at all, in the first place. Thus, it needs to go towards your bankruptcy estate.

If you are filing for Chapter 7 bankruptcy, the likelihood of you keeping your tax refund largely depends on the timing. If you get your tax return and file for Chapter 7 a month later, say goodbye to the refund; Chapter 7 involves giving up as much as you can and then dropping the rest of your debt and, once again, a tax refund is disposable income. If you file for Chapter 7 and then file your taxes a month or so later, the situation could be the complete opposite; you have already finalized your bankruptcy and the creditors don’t have power over you anymore, so whatever you get from the IRS is now yours to keep.

Do you have more questions you would like to get answered by a professional Fort Worth bankruptcy attorney? Bankruptcy and taxes are both complicated subjects alone, even more so together, so don’t feel frustrated if you still need some guidance. You can contact The Pritchard Law Firm for a complimentary initial case evaluation today.