Bankruptcy and Your Tax Refund

Many people look forward to tax season because it means they will get a tax refund. If you are planning to file Chapter 7 bankruptcy or have a pending bankruptcy case, you may wonder what will happen to your tax refund. Can you keep it? Will the bankruptcy trustee take it? The answer depends largely on the timing of your bankruptcy filing.

Refund for income earned the year prior to bankruptcy – In this case, the refund will be treated like cash and will become part of the bankruptcy estate, which is susceptible to liquidation if not protected by an exemption.

Refund for income earned the year you filed for bankruptcy – The refund stemming from income earned prior to your bankruptcy filing will become part of the estate. However, the percentage of the refund for income earned after you filing will be yours to keep.

Refund for income earned after filing for bankruptcy – You can keep these funds.

If you believe you may lose your tax refund in a Chapter 7 bankruptcy case, you can take certain steps to protect this money. First, if you’re planning to file bankruptcy but haven’t yet, you can spend your tax refund on necessary purchases. These may include:

  • Paying your mortgage or car payment
  • Groceries
  • Clothing (not including luxury purchases)
  • Medical treatment
  • Education expenses

Talk to your attorney about whether certain purchases are considered to be “necessary” to be sure. Another option if you’re planning to file in the coming year is to adjust your tax withholding so you get more in your paycheck but not a refund.

Contact Our Los Angeles Bankruptcy Lawyers to Discuss Your Situation

At Martin & Bontrager, APC, our bankruptcy attorneys will go over every aspect of the process with potential clients. We can help you resolve your financial issues, so call 323-940-1700 or contact us online today.