Are you considering declaring bankruptcy, but are afraid you'll lose your tax refund? I get that question a lot  as the tax season approaches.

Let’s say you are contemplating filing a Chapter 7 bankruptcy, and have calculated that you’ll be receiving a $2,500 tax refund.  What should you do?  Should you file your taxes now? File your petition first? Not say anything?

My answer is the same each time. If it's tax season, than most likely the trustee (who acts as a sort of like a judge in a bankruptcy case) will consider the tax refund as property of your bankruptcy estate, regardless of whether or not you’ve filed your taxes.  The answer is the same regardless of when you file your case - the trustee will consider the refund whether you file your case before you receive the refund, or after.  You never want to hide any assets from the bankruptcy court, as this would be grounds for a dismissal of your bankruptcy petition.  Additionally, you could face formal charges and its simply just not good karma.   

Now for the good news:  There’s a good chance that you'll be able to keep your refund because it may be covered by exemption laws. These are the laws that allow you to keep some assets after bankruptcy.  (There’s a myth out there that if you declare bankruptcy, you are left with nothing but the clothes on your back. Biggest myth ever.)  Whether or not you can keep your refund will depend on the value of the other assets you own (car, savings, clothes, furniture, tools of the trade, equity in home, etc.).  These days, when so many families are upside down on their mortgages and/or have lost their homes, they have few assets - so they're able to keep their tax refund.

If you already have the refund in hand, don’t (I repeat don’t) use your tax refund to repay a debt. If you repay more than $600 to say, your aunt, the trustee will count that as a “preference” and can take money back.  Now, if you need to use the money for living expenses (i.e. food, gas, car repairs, etc.), that's a much better idea.

As always, facts make a world of difference, so always talk with an attorney to make sure you do what’s right in your specific situation.  If you're in the San Francisco Bay Area and need a bankruptcy attorney, I am always happy to help.

 


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