The Internal Revenue Service (IRS) is pretty notorious all around the United
States for trying to get their hands into everyone’s finances, but
once a year they can actually give back, to some extent. By filing your
tax return correctly, you could wind up collecting decent money from the
IRS – just try to ignore the fact that they took so much more first.
But what if you are losing an uphill financial battle and considering
bankruptcy around the same time you need to file your taxes? Will you be able to
keep that tax refund?
Chapter 7, Chapter 13, and Your Tax Refund
From the get-go, there are some ways you can legally protect your tax refund
from being collected during bankruptcy, namely using legal exemptions.
This was recently covered in another one of our bankruptcy blog entries (Should I File Income Taxes Before or After Bankruptcy?) so be sure to give that one a read as well if you think exemptions will
work for you. For these situations, let us assume you did not qualify
for any exemptions. What can you do?
If you are filing for
Chapter 13 bankruptcy, your creditors are more likely to be able to snag your tax refund. This
is due to the fact that your Chapter 13 bankruptcy plan hinges on your
agreement and obligation to do as much as you can to pay off your debt,
or some of it, over the next few years. The tax return is considered disposable
income since you didn’t know how much you were going to get back
from them, if any at all, in the first place. Thus, it needs to go towards
your bankruptcy estate.
If you are filing for
Chapter 7 bankruptcy, the likelihood of you keeping your tax refund largely depends on the
timing. If you get your tax return and file for Chapter 7 a month later,
say goodbye to the refund; Chapter 7 involves giving up as much as you
can and then dropping the rest of your debt and, once again, a tax refund
is disposable income. If you file for Chapter 7 and then file your taxes
a month or so later, the situation could be the complete opposite; you
have already finalized your bankruptcy and the creditors don’t have
power over you anymore, so whatever you get from the IRS is now yours to keep.
Do you have more questions you would like to get answered by a professional
Fort Worth bankruptcy attorney? Bankruptcy and taxes are both complicated
subjects alone, even more so together, so don’t feel frustrated
if you still need some guidance. You can
contact The Pritchard Law Firm for a
complimentary initial case evaluation today.