This time of year I often get this question asked of me by new clients. It’s a good question. Because for most people it is the one time of the year that they get in many instances the equivalent of several months’ worth of salary all at once. Depending on your situation that may seem like a great thing, but as we will see in this post, maybe it is not.
First, you need to understand in bankruptcy any property, asset or item upon which you have a claim may potentially be property of your bankruptcy estate. Only an experienced bankruptcy attorney can tell you if some item of property is part of your bankruptcy or not and whether or not property that is part of your estate is protected under the applicable exemption statutes.
Tax refunds are part of your bankruptcy since it is money someone (the government) owes you. In a Chapter 7 case your bankruptcy estate is entitled to receive one year’s worth of tax refunds. This means any refund you have not received when you file bankruptcy is part of the bankruptcy and must be turned over. If you spend this money after filing bankruptcy your case can be dismissed, your discharge revoked and potential criminal charges brought for stealing from the bankruptcy estate.
In an Chapter 13 case the current policy is that you must turn over a portion of your tax refunds for the first three years of your plan. You are allowed to keep $1000 of the refund, no questions asked. You might also be able to keep another $1000 of the refund if you receive Earned Income Credits or Additional Child Tax Credits. Only an experienced bankruptcy attorney is going to be able to tell you your rights under the code.
So what should you do if you want to file bankruptcy and keep your tax refund? Make plans with an experienced attorney to determine what you can spend the money on prior to filing your case. You should also adjust your withholdings from future paychecks to make sure your refund is small and that you have that money in each of your paychecks rather than giving an interest free loan to the government.
