Tax season is upon us, and there is only one good thing about tax season (some of the time)… tax refunds.
If you are considering filing bankruptcy, and expect to receive a refund, it will probably be protected from your creditors. When you file bankruptcy, you must list all of your assets and all of your debts in the schedules. Tax refunds, or potential tax refunds, are considered an asset, and must be exempted from your creditors.
There is no specific exemption under federal law for a tax refund. However, the “wild card” exemption allows you to protect tax refunds, among other things. The first step if you are considering filing bankruptcy this spring is to actually file your taxes and determine what your refund will be. If you don’t do this, the bankruptcy trustees may hold your case open until the amount is determined.
Once you know what your refund will be, consult with your bankruptcy attorney to determine how best to exempt it. If your refund is particularly large, you may need to spend it down naturally, over several months. If, however, your refund is more modest, it is likely just a matter of excempting it with the available exemptions under federal bankruptcy law.
A second note about taxes and bankruptcy is you must have all of your taxes for the last four years filed. If you are not required to file taxes (because you are on Social Security or have no income), this is not an issue. But, if you are required to file taxes, it must be done before you file. Otherwise, you may not receive a bankruptcy discharge. Now, the taxes must just be filed, not necessarily PAID. So, if you believe you’ll owe the IRS money (or the state or local authorities), it will not prevent you from filing bankruptcy.
If you have any questions about your tax refund and bankruptcy, or any other bankruptcy questions, contact us at 412-414-9366. I would be happy to set up a free consultation to discuss your situation and see if I can help.