Will you lose your tax refund if you file for bankruptcy?
Many people dread filing their taxes and are scared to file due
to what they may owe the IRS or State in which they live.
Yet, many taxpayers will be entitled to a refund, and this
additional income can help someone play catch-up on bills or take
care of yearly purchases that they may otherwise not feel they can
A major concern of many debtors looking to file bankruptcy is
that the tax refund could be lost or taken. Generally,
however, the tax refund can be protected by an experienced and
knowledgeable attorney. Before spending your tax refund on bills or
debts that could potentially be included in a bankruptcy, it is
best to speak with an attorney. A debtor does not want to take
action and then later find out that how they spent the tax refund
could pose an issue for their bankruptcy. The timing of the filing,
as well as the type of bankruptcy filed, has an impact upon the
taxpayer’s ability to keep his or her refund check. It is always
best to consult with an attorney that is on YOUR side before doing
Timing of the bankruptcy filing
Some debtors may think that if they spend their returns prior to
filing for bankruptcy that they will be able to protect these funds
from the subsequent bankruptcy proceedings. This is not necessarily
the case. The bankruptcy trustee could review the ways in which the
money was spent, and could require the debtors to include the
refunds in their list of assets. So, again, it is important
to get good advice from an experienced attorney.
If the bankruptcy is filed before the taxes are completed, the
courts may require that the funds be used to pay creditors. It will
depend on several factors, and debtors need to be sure that the tax
refund will be protected before spending any of the money.
Type of bankruptcy
In a bankruptcy, the debtor lists all debts. Certain assets must
be declared, which includes the potential tax refund. Even if the
refund is mailed to or directly deposited in the debtor’s account,
the court must be informed about the income. Future refunds will
not be subjected to the bankruptcy proceeding, since Chapter 7 is a
closed in (generally) a 4-month period of time.
Under Chapter 13, it might become a little more complicated.
Chapter 13 requires debtors to repay debts over a three- to
five-year period. Any refunds issued during this period
could be held by the trustee to repay debts. Again,
however, it is important to get an attorneys’ advice to see what
may be required in a certain Chapter 13 Plan. No two plans are the
Consult an experienced bankruptcy attorney
If you are thinking of filing for bankruptcy, you need to have a
clear understanding of the impact that bankruptcy will have on your
financial situation, including any tax refunds that you may
receive. It is important to speak to a knowledgeable bankruptcy
attorney in your area to learn about the steps that you will need
to take to be able to regain your financial independence and to
protect as much of your money and assets as possible.