If I File for Bankruptcy, Can I Keep My Tax Return Refund?
Question: What happens to my tax return if I file for bankruptcy?
It’s tax time, which means you’re excited about receiving a tax refund, or you’re dreading paying more in taxes.
There generally is a bump in calls I get asking about bankruptcy around tax time, and one of the common questions is whether, if the person files for bankruptcy, can they keep their expected tax return refund?
I hate to break your heart, but the short answer is that it depends. A bankruptcy case has a whole bunch of different issues intertwined with each other.
I didn’t write this post to not give you a better understanding, though. So let me set up a hypothetical person.
Let’s run through an example bankruptcy filer
Let’s pretend that you are a single person that rents, with little to no assets (like retirement accounts, car, cash in bank accounts, etc). You work a W2 job, and you’re expecting a refund of $5,000.00.
Let’s also assume that, at the end of each month (after accounting for your reasonable living expenses) you have nothing left over (you take home $3,500.00 per month, and your expenses are about $3,500.00).
In this case, it is likely that you CAN keep your tax return refund.
IMPORTANT: No Matter What, You Must Claim Exemptions to Keep Your Stuff!
A potential tax return refund must be exempted. That is, in your bankruptcy papers, you have to make a declaration that, based upon one of several laws, the tax return refund is taken out of your bankruptcy estate and protected.
The exemption laws have different dollar values for different kinds of property. There are also both state and federal exemption laws, so you have to analyze all of your property under both sets of laws to see which one maximizes protection of your property.
If, on the other hand, you are the same debtor described above, except that you have $10,000.00 sitting in a bank account, keeping that tax return might be a challenge. The reason is you might not be able to exempt it. (For instance, in New York, under state law, you can only exempt up to $1,000.00 in cash/money in a bank account. Under federal exemption laws, you can use the “wildcard” exemption to protect things like cash or a tax return refund, but it is capped at around $11,500.00.)
Many of the clients that have used LORK to help them with their bankruptcy case have protected and kept their tax return refunds. If you are thinking about filing for bankruptcy, be sure that you analyze whether and how you can exempt your property, under both the state and federal laws, to see how you can maximize the property you can keep.
If you want the help of a bankruptcy attorney, contact LORK by clicking here.