When you file for bankruptcy, you understand that most of your assets have to go toward paying off your debt. What about a tax refund though? Can’t you keep that since it was not something you had when the bankruptcy started? Not necessarily, and a New City, New York bankruptcy attorney from our firm can tell you more about the rules.
Does the Type of Bankruptcy I Filed Matter?
In some cases, the type of bankruptcy that you filed for can matter. If you filed Chapter 7 bankruptcy, that liquidates your assets and uses them to pay off debts. However, some of your assets could be exempt from bankruptcy due to federal or state laws. Your tax refund could be included. It could also not be a factor at all depending on when you filed for bankruptcy and which tax year the refund is for, but we can talk more about that in a second.
In Chapter 13 bankruptcy, you have a multi-year plan for paying off your debts. Your income and available assets do matter, and any changes to your financial situation have to be reported to the bankruptcy trustee. This can often result in part or all of your tax refund being taken and put toward your debt.
When is a Tax Refund Considered Part of a Bankruptcy Estate?
Your “bankruptcy estate” consists of all of your assets when you file for bankruptcy. Your tax refund can be part of that estate. In Chapter 7, whether or not your tax refund is part of the estate can depend on when you filed taxes and bankruptcy. If you filed for bankruptcy in 2022 and the tax refund is from that year, then it is part of your bankruptcy estate. In the eyes of the law, that refund was one of your assets. The IRS was basically just holding that money for you.
However, if you file taxes for 2023 and get a refund, that is not part of the estate. It’s also important to note that if you file late returns and get refunds, those are also going to be part of the estate.
In Chapter 13 bankruptcy, any tax refund received while your payment plan is ongoing is considered part of the estate. Most trustees will take all or part of it unless you show that you need it to pay for expenses.
Can I Use Exemptions to Protect My Tax Refund?
You may be able to use exemptions in the bankruptcy rules to protect part of your tax refund. For example, the “wildcard” exemption can be used to protect your tax return or at least a part of it. It covers $1,475 in value and you can add whatever was not used from your homestead exemption.
Talk to Our Bankruptcy Attorneys
If you have any questions about filing for bankruptcy and how you can best protect your assets, contact the Lauterbach Law Firm. We can schedule a consultation and tell you more about your best options and how we can lead you to a better financial future.