How will filing bankruptcy affect my tax refunds?

Tax

It’s the time of year when people start thinking about tax refunds. Many people use overwithholding of taxes as a forced savings plan. My clients who do this often ask if they will be forced to turn over their tax refunds to the Bankruptcy Court or if they should wait to file their taxes until after their bankruptcy is completed.

As with many legal questions, the answer is “it depends.” Relevant factors include the Chapter under which you are filing, which Court has jurisdiction over your case, the size of the refund, and what exemptions are available to you.

A tax refund is an asset, even if you haven’t received it yet. Most bankruptcy clients are allowed to keep most (or all) of their assets. (See THIS BLOG POST for the reasons why.) Depending on which set of exemptions you use, your bankruptcy attorney may be able to protect your anticipated refund. If your attorney cannot protect the expected refund, he or she may be able to protect the funds once you receive them. (An expected refund is categorized differently than funds you have received and different exemptions may apply.)

For Chapter 13 filers, some jurisdictions require tax refunds to be surrendered to the trustee each year of the plan. Others allow the debtor to keep them. Your attorney can tell you how your jurisdiction treats this issue.

If you are considering filing for bankruptcy, be sure to speak with an attorney to determine what options will benefit you the most. Some people will be better off filing their taxes before filing bankruptcy, others will benefit by filing the bankruptcy first. This is an important decision that should not be made lightly. Timing can make all the difference.

Image credit: 401(K) 2013/Flickr

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