December 15, 2016
Tax season is often a good time to consider and review your bankruptcy options because many people use some of their tax refunds to pay for the bankruptcy, which can then allow you to discharge and eliminate most debts.
The question that might arise during this time of the year is whether you can keep your tax refunds if you do file a bankruptcy. Determining if you can keep your tax refunds is an important part of deciding if bankruptcy is an option for you. The answer in most chapter 7 bankruptcy cases is yes. However, this does depend on the total amount of the refund, the timing of the filing, and when it is received. The timing of a bankruptcy becomes a very important issue if you typically receive a larger refund. Another issue that can arise is if you get a refund and use it to pay back certain debts, or friends or family, and then want to file a bankruptcy. This can potentially create issues. For all of these reasons, it is advisable that you meet with an attorney prior to receiving your refund to determine what is allowable and what can create problems.
Another question that often comes up is, “Why do I need to tell anyone about my income tax refund?” This can be somewhat confusing, especially when the refund has not yet been received. The reason is because when you file a chapter 7 bankruptcy, you have to disclose all of your assets. The Bankruptcy Code has a broad definition of assets that includes property that you have a right to receive in the future that has not yet been received. For this reason, your income tax refund is considered an asset of the bankruptcy estate. However, the bankruptcy code provides protection for certain assets, and your tax refund is often an asset that can be protected under these protections, which are known as “exemptions” in the Bankruptcy Code.
Your next question may be, “Can I protect a large tax refund if I file bankruptcy?” Again, the answer is often yes, but it depends on the other factors in your case. This is when timing can become an important issue to consider. When you meet with our attorneys, we review all of your assets, including your tax refunds, to determine what can be protected in a bankruptcy. We can advise you and recommend the best possible strategy to fit your circumstances. One of our goals is to maximize the protection you have available under the law.
Many people use their tax refunds to pay for bankruptcy. In most cases, your tax refund can be protected. However, timing and what you do with the refund can be very important issues. Talking with a bankruptcy attorney prior to getting the refund is an important part of the process that can help free you from your debts.