Can I Keep My Tax Refund When I File Bankruptcy?

We all look forward to getting that big tax refund check each year, but what if you are still trying to get your bankruptcy case filed? In this blog, we explain what happens to your tax refund during your bankruptcy case.

First off, tax refunds are the primary assets that trustees usually take from debtors. Although states have exemption laws, they usually aren’t enough to protect your tax refund. Trustees target tax refunds because it doesn’t require overhead or the effort of listing a sale like other valuable assets might require. With tax refunds, they get a check that can be quickly cashed.

Tax Refunds Are Part of the Bankruptcy Estate

When you file for bankruptcy, all of the assets you own become part of the bankruptcy estate. Tax refunds are included in these assets. A trustee is supposed to represent your creditors, collect your assets, and liquidate said assets to pay your debts. Chapter 7 bankruptcy cases don’t always have enough assets or cash for the trustee to pay your creditors, but a large tax refund solves this problem. You should consult with an experienced attorney to discuss how to keep your tax refund.

Is There a Way to Keep My Refund?

Simply put, the best way to keep your refund is to file your tax return before filing for bankruptcy, this way you can receive your refund and spend it before you file your bankruptcy case. A skilled bankruptcy lawyer can inform you how to keep a good record of what you spend your refund on.

You should use your tax refunds for the following expenses, this way you don’t look financially irresponsible when you file for bankruptcy:

  • Mortgage Payments
  • HOA Dues
  • Rent
  • Utilities
  • Insurance
  • Car Payments
  • Educational Expenses
  • Home Maintenance & Repairs
  • Car Maintenance & Repairs

The goal of spending your refund before you file for bankruptcy is to end up with a minimal amount of your refund in your bank account when you file your bankruptcy case. If you have a retirement account, you might be eligible to save part of your refund. Consult with an attorney to find out if you are eligible.

It is important to be cautious if you plan to spend your refund before filing for bankruptcy. Spending your refund on luxury items, using it to repay a friend or family member, or paying off your credit cards or other unsecured debts, might trigger an objection from your trustee, in which case you will be required to hand over your tax refund, even if you already spent the money.

If you have more questions about how to keep your tax refund in bankruptcy, you should give us a call at (508) 926-8833. Our team of Worchester bankruptcy lawyers can assess your debts and help you file your declaration. We might even be able to get some of your debts discharged. Contact us today to schedule your free case evaluation.