Treatment of Tax Refund for Those who Filed for Bankruptcy

Dade County Courthouse in Miami, Florida
Miami Dade County Courthouse in Miami, Florida (image source: Elisa Rolle, CC-BY-SA 3.0 via Wikimedia Commons)

Tax season is upon us, and, although it comes with some stress, it also comes with anticipation of receiving a tax refund. While many people may have plans regarding what they will do with their refund amounts, those individuals who are considering bankruptcy or who are currently in an active bankruptcy proceeding need to refrain from spending any tax refunds they receive from the government, because they may not be able to retain their refund amounts.

Can I Retain My Refund?

Whether you have filed or plan to file a Chapter 7 or a Chapter 13 bankruptcy petition, it is imperative that you consult with an attorney about the possibility of keeping your tax refund. It is important to understand that for those involved in a bankruptcy, retaining your refund amount is never a guarantee, and the outcome on this particular issue may be different in each case. A number of factors are considered in determining if a petitioner can keep his or her refund or if the funds must be given to the trustee.

In cases like these, timing is an important factor to consider regarding when a bankruptcy petition was filed. In addition, there may be certain circumstances or strategies a petitioner can take advantage of before filing for bankruptcy to attempt to protect a refund anticipated in the future, depending on the type of petition they file. It is important to consult with a bankruptcy attorney in doing so to ensure any and all steps taken are legal, ethical, and fair to all parties involved.

Factors to Consider in a Chapter 7

Under a Chapter 7 bankruptcy, a tax refund is classified as an asset whether the petitioner has received it or anticipates receiving it in the future. The terms of a Chapter 7 allows the petitioner to claim certain assets as exempt. As such, the tax refund may be able to be listed as an exempt asset within the bankruptcy petition. Whether the petitioner is successful in doing so varies, and the full refund amount may not be able to be listed. A bankruptcy attorney would be able to guide their client in this process and advise them on what they could expect to happen in their specific case.

If the petitioner is not able to claim a refund already received as exempt, it may be a good idea to consider postponing the bankruptcy filing and spending the refund on necessities or to pay attorney fees. Doing this would prevent the refund from being considered an asset. They way in which a petitioner spends the refund certainly matters here, and choosing to postpone filing a bankruptcy petition is crucial. Consulting with an experienced attorney on these points is a significant benefit.

Factors to Consider in a Chapter 13

Debtors who have filed a Chapter 13 bankruptcy and have a bankruptcy plan must confer and consult with the trustee assigned to their case in order to determine if they can retain any portion of their refund amount. According to the terms of a Chapter 13, the refund would be viewed as disposable income. As such, the trustee is allowed to choose to retain the refund in its entirety. This is more likely to happen if the current bankruptcy plan only provides that a part of the petitioner’s debt will be paid back to creditors.

However, the trustee does retain some discretion in deciding if a petitioner can keep their refund, or a portion of it. Certain circumstances make it more likely that the debtor will be able to keep some or all of the money from a tax refund. A bankruptcy attorney can try to prove that special circumstances exist that warrant their client retaining the refund. If special circumstances do not exist, an attorney may be able to take preemptive measures prior to filing for bankruptcy to protect the refund.

Financial struggles and the problem of debt is a situation many people face. If you are experiencing tough economic times, perhaps bankruptcy is an option that could provide some debt relief. Contact the experienced bankruptcy attorneys at Hoffman, Larin, & Agnetti, P.A. today. We serve clients in Dade, Broward, and Monroe counties.