If you are considering filing for Chapter 7 bankruptcy, it is important you consider the effects that bankruptcy will have on your income taxes. Your ability to keep your refund will be affected by the amount of money in your refund, your exemptions, and when you file for bankruptcy.
Upon filing for bankruptcy, nearly all of your assets will become part of the bankruptcy estate, including any tax refunds you have not yet received. Any tax returns that are not exempt are subject to being claimed by creditors. Therefore, the only way to protect your tax return is to exempt it in some form. People who file for bankruptcy in Texas are given the option to exempt certain property under either state or federal exemption standards. A person must choose one or the other and may not mix the two plans. An attorney can help you choose which exemption structure is right for you.
While Texas exemptions are generous and will often allow a person to keep their home and large amounts of property, tax returns are not covered under state exemptions. If you wish to protect your tax return, you can do so under the federal “wildcard” exemption up to $1,225 plus any unused portion of the federal homestead exemption, totaling up to $12,725. It is important to keep in mind, however, that choosing federal over state exemptions may not be wise if you have significant equity in your home or large amounts of personal property.
If it is more advantageous for you to choose state exemptions, there are other ways of protecting your tax return. If you have the ability, simply wait until you have received and spent your tax return before filing for bankruptcy. If you spend your tax return on another asset, however, it will be subject to being claimed by creditors unless exempted. It is encouraged that you spend your tax return on living expenses prior to filing for bankruptcy, such as for food, gas, or car insurance.
If you are struggling to make ends meet under the weight of crippling debt, a Fort Worth bankruptcy lawyer from The Pritchard Law Firm can examine your financial situation and guide you through the process of filing for bankruptcy. Having earned a 2015 Avvo Clients’ Choice Award for our outstanding advocacy, we can provide the knowledgeable guidance you need to help you get through this difficult time and on the road towards a debt-free future.