Tax Refunds and Bankruptcy

It is the middle of March, and tax season is in full swing. With only a month left to file, it's an annoyance, in the least. I'm not sure anyone enjoys preparing taxes. However, the positive side is that many of you could be receiving a tax refund. People use their refunds for different things, from splurging, to paying for repairs on their home or car, to saving for another rainy Pittsburgh day. If you are preparing to file a bankruptcy, you should keep a few things in mind this time of year.

First, if you are currently filing a Chapter 7 bankruptcy, you will need to exempt your tax refund. This is because your tax refund is considered an "asset". Under bankruptcy law, it is your property. This is confusing for some of my clients, because most people think of "property" as cars or homes or TVs. But, under the broad definition of property in the bankruptcy code, a prospective tax refund counts as well. In most case, you will have more than enough exemptions to protect your entire refund (the "wildcard" exemption is usually sufficient), but you should still let your bankruptcy attorney know. This is especially the case when you have large deductions and expect a big return.

Another important thing to remember when filing a bankruptcy during tax season is that you should NOT spend the refund until you speak with your attorney. The bankruptcy trustee could question and challenge many expenditures of your refund, especially if it is a large, discretionary purchase (electronics, TVs, etc.). Also, anything you purchase would need to be exempted. So, if you receive a return of any significance, speak with your attorney first.

If you are in a Chapter 13 bankruptcy, you should let your attorney know if you receive any return larger than a few thousand dollars. The bankruptcy trustee will probably not be interested in your return, but keep your attorney appraised just the same. Once again, the refund is an asset of your bankruptcy estate that must be accounted for.

One final note about tax refunds... they can be used to file attorney fees. If a payment plan is unfeasible for you, this may be the best time of year to file bankruptcy. My filings normally peak during this time of year. It is money well spent if it wipes out tens-of-thousands of dollars of debt, or a lawsuit. It is completely permissible to use a refund, take advantage of this option if your debt is overwhelming.

Contact us if you have any questions about your tax refund and bankruptcy.