What Happens to my Tax Refunds in Bankruptcy?

 Looking to Keep Your Tax Refund?



                                        

           In a Chapter 7 bankruptcy, your refunds are generally safe from loss because they do not become property of the bankruptcy estate.  Refunds received before you file can be at risk if they are large (over $5,000) and if they are still in your bank account.  Definitely consult an Attorney before filing on your own.   Refunds received after you file are generally less risky.

            In Chapter 13 bankruptcy, tax refunds are very different.   Your entire budget is carefully analyzed and incorporated into your Chapter 13 plan. Once that is done then all of your “disposable income” is pledged to the plan to pay off your creditors.  If you receive a tax refund, then in the federal district this is considered to be extra income, which adds to your disposable income and must go straight to the trustee.   Your refund is then used to pay your creditors.   This is generally terrible news for Chapter 13 filers all of whom have better and different ideas of how to spend their money rather than paying off a 5 year old credit card debt!    While my firm routinely helps clients retain these post-filing refunds to pay for unbudgeted or unforeseen expenses, the receipt of these refunds poses a trap for unwary Chapter 13 filers.  

Every year many clients have their cases dismissed for failure to turn over their tax refunds.    The bottom line is that tax refunds and bankruptcy are a tricky combination, and legal advice is critical to getting it right and to planning properly.