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Tax Refunds and Bankruptcy

If you are considering bankruptcy as an option to solve your financial struggles, you might have many questions about your assets.  What do you get to keep, what do you have to repay? For example, do you need to inform the trustee in charge of your bankruptcy case about a tax refund?  Will that refund be lost to the courts or do you get to keep it?  These are great questions.  As with many aspects of bankruptcy, the answers are not always definitive.  It may depend upon the type of bankruptcy you are filing for (Chapter 7 or 13).  It may also depend upon the timing of the event or whether it is considered an exemption.  Let’s look at the case of tax refunds and filing bankruptcy.

Chapter 7 Bankruptcy

As in all Chapter 7 cases, the debtor must reveal all assets to a trustee in charge of your case – this includes a tax refund. As when filing for Chapter 7  all of the person’s assets become part of the bankruptcy estate.  A tax refund is an asset that the trustee can use to pay unsecured creditors. It is very likely that the trustee will ask about a tax refund at your meeting of creditors. Usually any assets you receive after filing for bankruptcy are considered assets. However, a tax refund can be tricky because it often involves a process that begins before the bankruptcy filing date and continues afterwards.

Chapter 13 Bankruptcy

In Chapter 13, your tax refund will be scrutinized by the trustee during the life of the repayment plan, which may last either three or five years. If you are in a plan that pays less than 100% of your debt back to creditors, the trustee has the discretion to keep your tax refund during the life of the plan. Since Chapter 13 requires that all disposable income be paid into the plan, most trustees classify tax refunds as disposable income. One of the only available preventive options in Chapter 13 is to adjust your employment tax withholding to decrease your tax refund. The less your refund, the less your trustee can take.

The best plan of action is to talk with a bankruptcy attorney to find out what may happen with your refund.