By: Samuel Pittman
Our clients are frequently concerned with how a Bankruptcy will impact their income tax refunds. As with most Bankruptcy questions, the answer to this concern depends on which Bankruptcy Chapter you file.
In a Chapter 7 Bankruptcy, the first step is to determine when you earned the income tax refund. In a Chapter 7 Bankruptcy, the Bankruptcy trustee will generally be entitled to any income tax refund you earned prior to your filing for Bankruptcy. For example, if you file a Chapter 7 Bankruptcy on January 15, 2020, the Bankruptcy case trustee is entitled to collect your tax refund for tax year 2019. The reason for this is that your income tax refund for 2019 was already earned prior to your filing for Bankruptcy on January 15, 2020. The Bankruptcy trustee will collect the income tax refund for payment to your creditors.
Also, the Chapter 7 Bankruptcy trustee is generally entitled to a portion of your income tax refund for the year that you file for Bankruptcy. For example, if you filed for Bankruptcy on June 30, 2020 (the half way point of the year), the Chapter 7 Bankruptcy trustee would be likely be entitled to one-half of your income tax refund for 2020 when you receive it in 2021. Likewise, if you filed a Chapter 7 Bankruptcy on September 30, 2020, the Chapter 7 Bankruptcy trustee would be likely be entitled to three quarters of your income tax refund for 2020 when you receive it in 2021. However, if your income tax refund is relatively small (generally $1000.00 or less), the Chapter 7 Bankruptcy trustee may not require you to turn it over.
Any income tax refund you receive for income earned after the Chapter 7 Bankruptcy filing is yours to keep.
In a Chapter 13 Bankruptcy, the Bankruptcy trustee is generally entitled to collect income tax refunds for distribution to your creditors during the life of your Chapter 13 Plan. Under certain circumstances, the Bankruptcy court may excuse you from turning over your tax refund to the Bankruptcy trustee. Some such circumstances may include:
- unexpected repairs to your home;
- unexpected medical or dental expenses for yourself or your children
- unexpected car repairs or a down payment on a replacement vehicle
- major appliance repair or replacement
- funeral expenses
A free consultation with one our experienced Bankruptcy attorneys can help you determine the impact of a Chapter 13 Bankruptcy on your income tax refunds.
Strategies for Income Tax Refunds
If you have received your income tax refund prior to filing for Bankruptcy, you may be able to spend it, prior to filing your Bankruptcy, on necessary items such as:
- Mortgage or rent payment (generally may not be paid in advance)
- Food and sundries
- Car maintenance
- Medical/dental/vision care
- Bankruptcy attorney fees and Bankruptcy court costs
You should not make the following types of payments with an income tax refund prior to filing a Bankruptcy:
- Purchase of luxury items
- Repayment to family members or friends
- Advance payment of expenses (paying rent ahead for example)
A free consultation with one of our experienced Bankruptcy attorneys can help you determine how best to proceed with your income tax refund prior to filing a Bankruptcy.
The examples given above are meant for illustrative purposes only and are not to be considered as legal advice. To determine how a Bankruptcy filing may impact your income tax refund, contact us to arrange a free consultation with one of our experienced Bankruptcy attorneys.