If you are thinking about filing for Chapter 7 bankruptcy, it is important to understand how this move might impact your ability to keep your tax refund. By considering the timing of your refund and bankruptcy filing, you can keep as much of your refund as possible.
When you file for Chapter 7 bankruptcy, all of your assets will become a part of the bankruptcy estate which is administered by a trustee. A tax refund will be considered an asset that the trustee will be able to use to repay creditors, and it is highly likely that the trustee will ask about your tax refund at your creditor meeting. Because tax refunds involve a process that often begins prior to your bankruptcy filing date and concludes afterwards, determining whether you’ll need to give up your tax refund can be tricky.
Whether you need to surrender your tax refund during your Chapter 7 bankruptcy will depend on how you coordinate the timing of your bankruptcy filing and the receipt of your tax refund. If you plan ahead, you should be able to retain your refund so that you can use this money for the payment of other expenses.
Your Chapter 7 bankruptcy trustee will base the amount of your tax return that you’ll need to surrender on the date that your bankruptcy was filed. If you file your bankruptcy on July 1 you’ll be required to turn over one half of your tax refund when it is received the following year because you filed half way through the year. Likewise, if you file a Chapter 7 bankruptcy on December 1.
If you receive your tax refund, but have yet to have filed for bankruptcy, you can prevent your refund from becoming part of the estate by spending it. However, it is important that you spend the money on necessary items, and approved expenses such as utility payments, mortgages, rent, home repairs, medical care, clothing, or education. Using your tax refund to pay for your bankruptcy legal fees is also an acceptable expense. Luxury goods and loan repayments to friends or family are not allowable expenses.
If you receive a tax refund for last year’s taxes, you will most likely be required to turn over the refund to the Chapter 7 Trustee.FREE CONSULTATION