Do you know what happens to your tax refund when you file bankruptcy? According to the IRS data in 2004, 77% of tax returns resulted in taxpayers receiving a refund. In 2018, the average federal tax refund was $1,865. But what happens to the money when you’re filing Chapter 7 bankruptcy?
Can Bankruptcy Filers Keep Their Tax Refunds During Chapter 7 Bankruptcy?
If you’re wondering whether or not bankruptcy filers can keep their tax refund during bankruptcy, the answer is…maybe. Tax refunds are technically the property of the estate. Since your bankruptcy estate is the pool of your assets on the date you filed bankruptcy, any tax refund would be included.
Can a Tax Refund Be Protected During Bankruptcy?
Unless an asset is protected by an exemption, any asset that is part of the bankruptcy estate can be distributed to creditors to repay debts. Tax refunds can be tricky because they are often considered part of the bankruptcy estate even if they are not received until months after filing bankruptcy. If a bankruptcy petitioner earned all or part of their tax refund for work performed before filing bankruptcy, that portion of their tax refund is part of the bankruptcy estate and belongs to the bankruptcy trustee (unless an exemption protects it).
Filing Bankruptcy at the Beginning of the Year:
If you file bankruptcy in January, and you file your taxes for the previous year in March of that same year, 100% of any tax refund issued belongs to the bankruptcy estate because 100% of the work performed that resulted in the tax refund occurred before filing bankruptcy. Unless there is a way to protect the refund with an exemption legally, the bankruptcy trustee is entitled to the full tax refund.
Filing Bankruptcy Mid-way Through the Year:
If you file bankruptcy halfway through the year, and file taxes for that year the following spring, any tax refund issued is divided. If the bankruptcy filing occurred 50% through the year, the bankruptcy court would be entitled to 50% of the tax refund, and the filer would receive the other 50%. If the bankruptcy was filed 70% into the year, the bankruptcy court would be entitled to 70% of the tax refund, and the filer would receive the other 30%. Unless the bankruptcy filer’s attorney can protect the entire return with an exemption, the bankruptcy trustee will claim the percentage the court is entitled to and use it to pay creditors.
If you are worried about losing your tax refund during bankruptcy, we can help. Trust the experienced Tennessee and Georgia bankruptcy attorneys at Kenneth C. Rannick P.C. to help you determine your best options. We help good people through bad times every day, and we can help you, too.