Tax season is right around the corner. For some of us, this means receiving
a tax refund that is sure to provide some financial relief. For others,
an air of uncertainty abounds as they prepare to file their taxes
and file for
Chapter 7 bankruptcy. If you are in this second group, you are undoubtedly wondering, “Will
I be able to keep my tax refund despite my looming bankruptcy?”
After all, Chapter 7 bankruptcy is all about paying off as much of your
debt as possible and then dropping the rest. So will you be able to keep
it when the dust settles? The answer is a certified
It boils down to the details, specifically to
when you file for bankruptcy and
when you receive your tax refund:
- If you file for Chapter 7 and your last tax refund was a year ago, that
money is more than likely going to wind up in your bankruptcy estate,
or what creditors are allowed to get their hands on as your bankruptcy advances.
- If you file for Chapter 7 the year of your tax refund, it could be split
up between you and the bankruptcy estate. Money you earned before filing
will go to creditors and money you earned after the date of filing –
there is no such thing as an instant bankruptcy case – will go to you.
- If you file for Chapter 7 and your next tax refund comes a year later,
the entire refund should be yours to keep. Your successful bankruptcy
should allow you to step away from your debt and start anew, and thus,
there are no creditors left to take your refund.
Tax Planning and Bankruptcy Filing
You are the only person in control of when you file for bankruptcy and,
in a way, when you file your taxes and receive a refund. If you plan ahead
to coordinate your two separate filings, you can increase your chances
of holding onto your tax refund.
Consider these options to keep as much for yourself as possible:
Exempt: Based on the size of your estate and where you live, you may be able to
keep a certain dollar sum exempt from creditor payments. If your estate
is somewhat small and so is your tax refund, it can probably be considered
outright exempt, regardless of when you file.
Withholding adjustment: You do not need to get all of your tax refund in one lump sum. You can
instead adjust the amount you wish to withhold and only pay what you owe
at the time of filing. This can stagger your tax refund amount to future
paychecks, allowing you to collect some or most of it after you file for
Expenditures: Even the meanest-looking Chapter 7 bankruptcies should not strip you of
your right to necessary expenditures. If you get your tax refund but still
need to file for bankruptcy in the near future, spend it! Reminder: you
need to spend it on
necessary things, such as mortgages, rent, utilities, food and clothing, and medical
care. Do not go out and buy a new television, for example. Not only will
that likely be snatched up by creditors but it could flag you for fraud.
Preparing your taxes or a bankruptcy filing can be hard work all on its
own. When the two combine or come up around the same time, the stress
may feel multiplicative or exponential. Let our Fort Worth bankruptcy
attorneys from The Pritchard Law Firm take that load off your shoulders
by retaining our professional services that are backed by 45+ years of
collective experience and happy
client testimonials. Why not
contact us today for information about your case? We offer
complimentary initial case evaluations so you have nothing to risk but much to gain.