Can I keep my tax return if I file Chapter 7 bankruptcy?

Updated: May 27, 2021

If you get a tax return when you file taxes, you may be wondering if you will lose it if you file for bankruptcy. As with just about everything in bankruptcy, this is determined by several factors. Bankruptcy trustees care about your assets. They want to use the assets that are not exempt to pay off creditors. Though you can keep assets you receive after filing, taxes can be a little more involved.

When did you file your taxes and when did you file your bankruptcy?

1. If you filed the year before your bankruptcy, unspent money goes to the estate and is treated like cash. You can keep cash when you file for Chapter 7 bankruptcy, but only if the cash qualifies as an exempt asset.

2. If it is the year of bankruptcy, a tax refund based on the income you received before you file for bankruptcy goes to the estate. You can keep a portion of the refund to the extent that the refund is based on income earned after the filing date.

3. The year after the refund you can keep the entire amount.

There are several ways that enable you to keep your refund due to timing. If you can plan enough in advance, you can adjust your exemptions to reduce the amount of the return. You can also cover the amount of the return with an exemption in bankruptcy. It is also possible to keep the refund if you will be spending the amount on necessary expenses. Qualified expenses include things such as:

  • mortgage payment, rent, or home maintenance

  • utilities

  • food

  • clothing

  • medical

  • car payments, maintenance

  • education.

Expenses that will not qualify are:

  • luxury goods

  • repayment to friends or family members

  • repayment of a credit card.

It is a good idea to consult an attorney to be sure you know where you stand. In bankruptcy, there are many details that are determined by time and circumstance. Knowledge is what removes the fear and helps you get unfrozen!

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