Many Americans look forward to getting their tax refund check every tax season. It feels like an annual bonus after working so hard all year. And it gives a lot of people a moment of financial freedom when it comes. 

Unfortunately, bankruptcy might rip that feeling away from you. Most of the time, bankruptcy filers must turn their tax refund check over to their bankruptcy trustee, but there are instances when this does not have to happen. Sometimes, you are allowed to keep all - or at least a portion - of your tax refund check. Keep reading to find out more information about your refund check and how each chapter of personal bankruptcy will affect it. 

Chapter 7 Bankruptcy & Your Tax Refund

If you filed Chapter 7 bankruptcy, your bankruptcy trustee will most likely take your tax refund check to pay your creditors. When you file for bankruptcy, a trustee is appointed to your case. This person is responsible for determining which of your assets (such as funds in your bank account, your house, and your car) are part of the bankruptcy estate. 

Bankruptcy code provides a wide spectrum for the trustee. If you receive money that is due to you from work that you completed three months ago, that money would become part of the bankruptcy estate. Waiting to file taxes until after your file bankruptcy will not make a difference - your tax refund will still become part of the bankruptcy estate because it is a refund on the income taxes you paid on income you received prior to your bankruptcy filing. 

Next year’s refund is one that you can look forward to spending, though. It should include, for the most part, taxes that you paid on income that you made after you filed for bankruptcy. This is because Chapter 7 bankruptcy filers are entitled to IRS refunds that are based on any income they earned after they filed bankruptcy.
However, if you file for bankruptcy in August, for instance, the refund situation can become complicated. The majority of the year’s income has already been earned at this point of the year. In this case, the bankruptcy estate may be entitled to the majority of your tax refund next year, while you will be left with a small portion of it.  

Chapter 13 Bankruptcy & Your Tax Refund

Since Chapter 13 bankruptcy is based on the reorganization of your debts as opposed to Chapter 7 liquidation, your IRS refund will be handled a bit differently. Your trustee might decide that it needs to be allocated to your debt payments or you might be able to keep it if you are making your payments in a timely manner.
Chapter 13 bankruptcy is called reorganization bankruptcy because it eventually turns into a repayment plan that you are obligated to stick to on a monthly basis for three to five years to pay off your debts. The plan is based on a variety of factors, including your income, total debts, and essential expenses. This plan often takes your IRS refund into consideration, because your tax refund is basically overpaid income taxes. 

If you do not have much disposable income, you can expect to turn your IRS refund over to your trustee who will then pay your debts with it. Obviously, being forced to pay your tax refund to your creditors is a hard pill to swallow. We have seen trustees review clients’ taxes and consider the tax refund and then allow the clients to keep their refunds. In these cases, the clients had made all of their payments on time and were not experiencing any problems with their repayment plans.  

Ultimately, any decisions regarding your IRS refund during your bankruptcy will be made by the trustee. You should either consult with the trustee or ask your attorney to talk with the trustee to find out what is going to happen to your refund. 

How Exemptions Can Help You 

In both types of personal bankruptcies, there are a number of exemptions that permit you to hold onto specific assets. Some exemptions allow you to keep your home, your personal vehicle, clothing, and essential appliances. You may also be able to exempt your pensions and insurance benefits.

You should ask your attorney if there are any exemptions that will allow you to keep your IRS refund if you are worried about it. An exemption might be able to help you keep some or a portion of your refund. There are federal and state exemptions and figuring out exemptions alone can be complicated. 

That is why you should have an experienced bankruptcy attorney by your side throughout the process of bankruptcy. It is a complex process full of intricate and important details. You might lose some things, including your tax refund, during the process of bankruptcy and you will be forced into sticking to a tight budget for a long time for months and even years. But, bankruptcy can be the light at the end of a long, dark tunnel of financial problems.

Are You Considering Filing For Bankruptcy?

If you feel bankruptcy is the best option for your financial situation you need to speak with an experienced bankruptcy lawyer as soon as possible. Please contact us online or call our office directly at 888.348.2616 to schedule your free consultation.

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James Roswold
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James Roswold is a Kansas & Missouri personal injury, workers comp, and medical malpractice attorney.