As tax season comes to an end, many of my bankruptcy clients want to know whether they can keep their tax refund. The answer is it depends. It depends on when you filed your bankruptcy, how much your refund is, what bankruptcy chapter you filed, why you need your refund, etc.
Chapter 7 Bankruptcy
If you filed a Chapter 7 Bankruptcy, your tax refund is automatically deemed to be property of your bankruptcy estate and must be turned over to your Trustee ASAP. The Trustee will use the refund to pay off your creditors. You may be able to keep all or part of your refund if you are able to exempt it. When you file bankruptcy, you are allowed certain exemptions you can use to keep some of your property. You can use some of your exemptions to keep your tax refund if you choose.
Chapter 13 Bankruptcy
Each year you are in a Chapter 13 Bankruptcy, your refund is a part of your Bankruptcy Estate and it must be turned over to the Trustee. This is because your tax refund is considered disposable income. The reasoning behind this is that your normal monthly income is enough to pay all of your necessary monthly expenses as well as your plan payments. Thus, you do not need your tax refund.
You may be able to keep your tax refund in your Chapter 13 Bankruptcy if you can prove that you need it for an unexpected and necessary expense such as repairing or replacing a vehicle or appliance, or for a medical or dental expense. Needing your tax refund to purchase food, pay utilities, make a car payment or any other regular expense generally covered by your monthly income will not be acceptable expenses.
If you are thinking about filling bankruptcy and are worried you will not be able to keep your tax refund, consult with an attorney today to find out what options are available to you. Speaking with an attorney and planning when to file your bankruptcy may allow you to keep your tax refund