Many couples depend on their tax refunds to help catch up on bills or fund vacations. If you file bankruptcy, though, you might be required to give a portion or all of your tax refund to the court, who sees the refund as an asset. It depends on several factors, so ask your attorney about your specific case before counting on your tax refund to help you in a financial crunch after bankruptcy.
When you file for Chapter 7 bankruptcy, you are asking the court to write off your existing debt, with the possible exceptions of your house and car. In return, you must disclose all financial assets to the court, and the trustee determines which assets should be used to partially pay back the creditors. Your tax refund can be considered an asset, so the trustee might demand you send your tax refund to the court. In Chapter 7 bankruptcy, this applies only to your current refund, or to any refunds that are outstanding from previous years. It doesn't affect future refunds.
If you have filed your taxes and are expecting to receive a tax refund after you file bankruptcy, the trustee is likely to require the money be sent to the court. The court often petitions the IRS to send the money directly to the court, but if not, you must turn your check over when you receive the refund. The money is considered an asset, and the trustee has the right to use assets to pay your creditors. If you file after you received your refund, the court looks at how the money was spent to determine whether you must pay it back to the court. For example, if you used it to pay a credit card bill that's going to be charged off in the bankruptcy, the trustee can decide that you showed preferential treatment to that creditor and require the money to be turned over to the court for the court to disperse. However, if you used the money to pay for your house payment or other living expenses, the trustee likely will not require you to give the court your refund money.
The court only considers current tax years when deciding whether your tax refund is an asset. If you haven't filed taxes for several years, you must get your taxes in order before filing bankruptcy. Any outstanding refunds from those years could be seized by the court. However, refunds from tax returns you file in the future cannot be taken by the court. Also exempt are most refunds that result from participation in a welfare program, which lowers your withholding amount, or earned income credit.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is different from Chapter 7 in that you must pay back a portion of your debt over several years. The trustee sets up a payment plan and tells the creditors how much of the debt they will recover. You pay the court each month, and the court distributes the funds to the creditors. In some cases, the trustee might require you to turn over the current year's tax refund to the court to disperse to the creditors. However, the trustee can require you to turn over your tax refund for the length of the payment term, which is usually three to five years. In this case, the court typically petitions the IRS to pay any refunds directly to the court, but if you receive the check, you must turn it over to the trustee instead of cashing it.
- Grateful Lawyer: If I File Bankruptcy, Will I Lose My Tax Refund?
- Bankruptcy Law Network: Will My Chapter 7 Affect My Tax Refund?
- Tulsa, Oklahoma Bankruptcy Attorney: Will I Lose My Income Tax Refund if I File Chapter 7 Bankruptcy in Oklahoma?
- Craig Shopneck Chapter 13 Trustee: Frequently Asked Questions
- David De Lossy/Photodisc/Getty Images
- How to File Taxes After the Due Date
- How to Calculate the Late Penalty for Filing Taxes
- Do I Have to File Taxes If I Don't Work?
- Do I Need to File a Tax Extension If I Don't Owe?
- Tax Preparation Checklist for a Homeowner
- Does Everybody Have to File Taxes?
- Minimum Income Required to File Federal Taxes
- Do I Have to File Taxes if I Only Made $1,000?
- What Happens If I Have Not Filed My Taxes in Two Years?
- What Is Tax Form 1099-G?