What happens to my tax refund in bankruptcy?

If you have filed for Chapter 7 or Chapter 13 bankruptcy, you already know that any assets in your “bankruptcy estate” are available for creditors to take. A tax refund is automatically considered the property of the bankruptcy estate. However, if you are expecting a tax refund, there are ways to keep the refund from going directly to the hands of your creditors.

As soon as you know about the expected tax refund, you should talk to your bankruptcy attorney about putting it in the bankruptcy petition. Like other assets, tax refunds can be exempted, either partially or fully, which will keep the refund from being lost to creditors. Many states have there own system of exemptions, and there are federal exemptions as well. If you are not sure of the amount of the expected refund, your bankruptcy attorney can show you how to list an unknown amount. If your bankruptcy attorney determines that listing an unknown amount will interfere with your exemption limits, you may want to wait to file the tax refund in the petition until after you have received it. Since you are only allowed a certain amount of exemptions, filing a tax refund as one of them can mean that you are not able to exempt other assets, such as bank accounts and jewelry, so it is important to weigh all of your options before you make a final decision.

If you have not filed for bankruptcy yet, and can afford to wait a few months before doing so, it may be your best option to hold off on filing if you are expecting a large refund. Once you receive the refund, be sure to spend it on necessaries. This includes expenses such as your mortgage, medical expenses, or clothing. In most cases you are allowed to use your refund for these purposes, and it is doubtful that the court will object to using your refund this way when you eventually do file for bankruptcy. However, it is important to talk to your bankruptcy attorney about your options, so that you don’t risk losing hundreds or even thousands of dollars in tax refund money to your creditors.

Another thing to consider when you file for bankruptcy is to remedy the tax refund “problem” before it appears. This can be done by talking to your employer to make sure that the least amount of taxes possible are being withheld from your paycheck.

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