by UpRight Law
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Tax Refunds and Bankruptcy

Posted by Tiffany Sanders, J.D.


For many people with too much debt and not enough income, tax season is among the best times of the year. The annual influx of cash known as the federal income tax refund can stabilize family finances and even provide for a bit of luxury…in the short-term. The relief doesn’t last, though, and that means looking for a longer-term solution.

One option for people caught in a cycle of debt, late payments and mounting fees and interest is bankruptcy. Many people filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy are concerned about what will happen to their income tax refund if they file. The answer is different depending on a variety of factors, including which type of bankruptcy you file.

Taxes and Chapter 7: How it Works

The impact of Chapter 7 bankruptcy on an income tax refund depends largely on:

  • When the bankruptcy petition is filed—the income tax refund is usually not at risk unless the petition is filed near the end of the year or while the refund is outstanding
  • The exemptions in your state—whether and to what extent a tax refund can be protected in Chapter 7 bankruptcy will depend on the state exemptions and whether the state allows the debtor to opt for federal exemptions

During your initial consultation with a bankruptcy attorney, the lawyer will be able to tell you more about the exemptions in your state and how the time of filing might impact your ability to keep your income tax refund.

Unless there are unusual circumstances, such as a backlog of unfiled tax returns that result in refunds for multiple tax years, Chapter 7 will typically either have no impact on receipt of a tax refund, or will put a single tax refund at risk. Filing taxes after bankruptcy is generally exactly like filing taxes before you ever considered bankruptcy.

Taxes and Chapter 13: How it Works

In most cases, the Chapter 13 trustee will claim income tax refunds during the plan and add the funds to the pool of money being distributed to creditors. There are possible exceptions, though. For example:

  • If the plan provides for 100% payment to unsecured creditors
  • If the debt can demonstrate a change in circumstances or short-term need that warrants the trustee disclaiming the refund

The Chapter 13 trustee has the discretion to disclaim the tax refund and allowing the debtor to keep it, so other factors may impact the determination.

Your bankruptcy attorney can explain in greater detail the type of circumstances that might allow you to keep your income tax refund in a Chapter 13 case, and the usual practices of your local bankruptcy trustees.

Unlike Chapter 7, Chapter 13 bankruptcy may impact the debtor’s claim on his or her income tax refund for 3-5 years—as long as the Chapter 13 plan remains in effect.

Talk to an Experienced Bankruptcy Attorney

When you’re concerned about the impact filing bankruptcy might have on your tax refund and how best to manage bankruptcy and filing taxes, an experienced consumer bankruptcy attorney can be your best resource. Schedule a free consultation right now.




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Posted on February 27th, 2018

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