Can You Keep Your Income Tax Refund When You File Bankruptcy?

by Gary on February 15, 2013

Each tax season, people who have filed or are thinking about filing bankruptcy ask whether they can keep their tax refund. Since a tax refund is considered an asset that becomes part of your estate, keeping it depends on several factors. If you have already filed, then your refund becomes part of the estate the minute you receive it. If you have not yet filed, then your refund may become part of your estate if it is sitting in a bank account and it is not covered by an exception or exemption in your state. However, there are other instances when your refund may become part of your estate.

One big factor that will be considered by the trustee is the size of your refund. Even if you have not yet filed, if you still have some or all of your refund at the time of filing, that money may be used to satisfy some or all of your creditors’ claims. Depending on your personal circumstances and whether you will or have filed for Chapter 7, Chapter 13, or Chapter 11 bankruptcy, you may not be able to hold onto your tax refund even if you received it before filing. However, there are always exceptions to the rule.

A Few Exceptions

Some of these exceptions will indicate that all refunds should become part of an estate. For instance, the earned income tax credit may be one of the exceptions that will allow you to hold onto a portion of your refund that is directly related to the credit. There may be others, too. Depending on whether you plan to file for Chapter 7 bankruptcy, Chapter 13 bankruptcy or Chapter 11 will have an impact on whether or not you can keep you refund.

In many cases, filers are allowed to keep a portion of their refund. How much a filer can keep depends on numerous factors which include whether any exceptions or exemptions apply. Once someone files, the minute a refund is received, it becomes part of the estate. Although this does not mean that the filer will lose the refund, they may have to hand over the money to the Trustee overseeing their case. This is why so many people who are expecting a refund do not file until they have received their rebate.

Even if the tax refund is received before someone files, he or she may not be able to keep the money or the items purchased with the money. However, if you use the money to pay for qualified expenses, then you may not have a problem.

Best Ways to Keep Your Refund

Spending your refund to cover your rent, mortgage or car payment is probably the safest thing to do if you want to keep your refund. However, there are always exceptions to the law, which is why it is important to consult with a lawyer before receiving and using your refund.

Since every case is different, you should never make any assumptions about whether or not you will be able to keep your refund. This is true whether you have filed or plan to file for bankruptcy in the near future. Whether you have already filed or are planning to file in the future, you should consider the benefits of discussing your case with a lawyer now.

Leave a Comment

Previous post:

Next post: