What Happens to Tax Refunds During Bankruptcy?

Trustees can take tax refunds to pay debts in bankruptcy. Rest assured they will know about it, as the process requires you to disclose all of your financial information. 

There are, nevertheless, some instances in which a bankruptcy lawyer can protect that money.  We know that many families rely on their tax refunds for months. 

Here’s what you need to know.

Chapter 7

In a Chapter 7 bankruptcy, the trustee takes your non-exempt assets and sells them to pay off creditors. It is possible to lose the first tax refund that’s due under a discharge so that the trustee may use that money to pay your taxes.

The trustee may not be able to seize your entire refund. Refunds from money earned after you filed for bankruptcy should be safe. 

You only lose this refund once.

Chapter 13 

Your Chapter 13 payment plan may require you to contribute your tax refund, but it will depend on how your plan is structured. 

Some plans simply set up a monthly payment plan. If you keep paying your monthly payments, the trustee might not care where the source of that money comes from, and might leave your tax refunds alone.

Much depends on the facts of your specific case. 

Using Exemptions

Many people will get to keep their tax refunds because they’ll be classified with exempt income. New York offers a $1,150 wildcard exemption that could be used for this purpose if there is no better place to use this exemption. 

If we choose to use federal exemptions instead, we can use a $1,475 wildcard exemption to protect your tax return. If you don’t use the homestead exemption, we can protect an additional $13,950 with the homestead exemption, a necessity in some cases as tax refunds are $3,651 on average

In addition, prior to filing for bankruptcy you can spend your tax refund on necessary items such as rent payments, mortgage payments, utilities, food, clothing, vehicle maintenance, and medical care. Just be sure that you are spending it on necessities, as spending it on luxury items or debts owed to family members or friends can get you into trouble.

Get Help Today

As you can see, even a small issue like the disposition of your tax refund can get quite complex in a bankruptcy case. 

Protect your financial future by reaching out to a qualified bankruptcy attorney. Call our office to schedule a free case review today. 

See also:

What Will Your New York Chapter 13 Payment Look Like? 

What is it Like to Live on a Chapter 13 Budget? 

Can Bankruptcy Help with Back Taxes? 



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