Be Careful With Your Tax Refund in Bankruptcy

Ahh, tax season everyone’s favorite time of the year. While no one enjoys paying their taxes, most look forward to receiving their tax refund. It never hurts to have a little extra cash in the wallet. If you are considering filing for bankruptcy after January 1, it is important that you discuss how best to protect an anticipated tax refund with your bankruptcy attorney or your wallet might feel a little lighter than you had expected.

It is important to understand that your tax refund is an asset that is part of the bankruptcy estate, if you’re not careful the trustee will take it from you. Tax refunds are the number one asset that bankruptcy trustees successfully go after. If you are entitled to a tax refund, the amount of the refund becomes your property regardless of whether you have filed your return yet. If you fail to disclose and then try to exempt your return it will be vulnerable to liquidation by the bankruptcy trustee.

Remember that while your chapter 7 bankruptcy case is pending most of your property is part of the bankruptcy estate. This means that for a short period of time the Court actually has some control over what you do with your property. If you properly disclose and fully exempt your interest in your tax refund, you will be able to keep all of it. Your ability to do so will hinge on your state’s exemption laws which is why it is so important to consult with a knowledgable bankruptcy attorney who can advise you how best to protect your tax refund. In some cases, the expected receipt of a large tax refund may necessitate delaying the bankruptcy filing or turning over the non-exempt portion of the refund to the trustee. In any event, if you are considering bankruptcy, it might be better to keep the tax refund small.