It’s that time of year where some of you may be looking forward to getting money back when you file your tax returns. But if you’re struggling with debts and considering a bankruptcy, you may or may not be able to keep that check from Uncle Sam.
Chapter 7 Bankruptcy
The bad news first. If you’ve already filed for a Chapter 7 bankruptcy, your tax refund will more than likely need to be turned over to your bankruptcy trustee. If it’s the tax year after you’ve filed a Chapter 7 bankruptcy, the tax refund money is yours to keep. If the tax refund is in the same year that you’ve filed for bankruptcy, then you may be able to keep a portion of the refund if it’s considered as income for the current year. Plan on having your bankruptcy trustee confiscate next year’s refund if you file for bankruptcy in September or later. You may feel that the confiscation of your tax refund is unfair, but it really does make sense from the court’s point of view. The court views this tax return refund as excess money that should have been retained by the individual in their checking or savings account. Because this money is considered an asset, it will be distributed to your creditors as if it were part of your income.
Tips to Keep Your Tax Refund
If you intend to file for bankruptcy, you can simply put your bankruptcy on hold until you receive your tax refund, then spend it. If you do spend the money, make sure that the items you purchase cannot be liquidated to satisfy a debt. You can still exclude these items from your bankruptcy as part of your exemptions, but if you really want to play it safe, just don’t make any unnecessary purchases. So what items can you purchase that would be considered safe? Following is a partial list, published by the Utah State Legislature, of exempt items in a bankruptcy. This list includes necessities like food, a refrigerator, a washer and dryer, etc. You can find their list here: Title 78B Chapter 5 Part 5 Section 505
Chapter 13 Bankruptcy
With a Chapter 13 bankruptcy, your payments will be scheduled between three to five years, so your income tax returns will be subject to confiscation during this time. Unlike Chapter 7 bankruptcies though, a Chapter 13 will allow you to keep up to $1,000 each year. An additional amount of up to $1,000 can be kept if the individual can participate in the Earned Income or Additional Child Tax credits. Start Fresh Utah can help you to better understand what to expect with regards to your tax refunds and bankruptcy. We offer a free consultation, so contact us today.