Many of us look forward to getting a tax return each year and this can be especially helpful when you have debt you need to get caught up on. Sometimes a tax return isn’t enough and you need to explore additional ways to take care of your debt. If you’re considering bankruptcy, you may wonder what will happen to your tax refund. Will the IRS hold it from you? Will it be sent to your creditors? Whether you get to keep your return or not all depends on timing. We can strategically plan when you file to help ensure you’re set up for a successful financial future.
During the 341 Meeting, the court trustee will be evaluating your assets to determine if anything can be sold to repay your creditors in a Chapter 7 and to set up your repayment plan in a Chapter 13. Your tax return is considered an asset, as are your bank accounts, cash, and property. The trustee will not automatically take your tax return as an asset, and we’ll work together to keep this from happening.
Generally, your refund for the year before and after your bankruptcy will not be in jeopardy. The year of your bankruptcy can be a little trickier, however, since the return can be based on money you earned before and after filing.
All About Timing
If you think you’re going to file bankruptcy in the coming year, you can change your tax withholding so that you don’t get a refund. You’ll receive more money in your paychecks and your return will probably be too small for the trustee to bother with. This can be risky because you don’t want to end up owing money when you file your taxes. You may want to check with a tax professional before going this route.
If you receive your tax return after you file but before your case is resolved, this could be considered an asset that the trustee could use to repay creditors. Fortunately, the court allows many types of exemptions to protect your property and belongings. I’m familiar with all the regulations surrounding exemptions and will make sure your case is solid.
If you haven’t filed bankruptcy yet and have already received a tax refund, you can avoid having the refund taken by spending it. You just need to be careful to spend it only on approved necessities such as food, medical care, car payments or repairs, utilities, mortgage/rent, or education. The trustee will expect to see documentation showing how the refund was spent.
It’s Your Money
If you’re concerned about losing your tax refund in bankruptcy, there is no need to worry. By working with a professional tax attorney, you’ll be able to keep more of your money that you worked so hard to earn. Call me with any questions and let’s get started.