When did you file your taxes and when did you file your bankruptcy?
1. If you filed your federal income tax return last year prior to filing 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 federal tax refund.
The Solution
There are several ways that enable you to keep your refund due to timing. If you have a timely file, 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:
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mortgage payment, rent, or home maintenance
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utilities
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food
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clothing
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medical
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car payments, maintenance
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education.
Expenses that will not qualify are:
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luxury goods
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repayment to friends or a family member
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repayment of unsecured creditors.
These would be bad faith payments because, at the meeting of creditors, they will want to know that they are going to get any money that needs to be part of the bankruptcy estate needs to be paid to deserving creditors.
When you work with an attorney to prepare a bankruptcy petition for a bankruptcy case, they can help you navigate these complicated tax situations. They will work with the bankruptcy trustee and help you discern the bankruptcy code. Conversely, tax debt is not a dischargeable debt.
Every financial situation is different and so is every bankruptcy filing. Your tax situation will most certainly affect both of those things. In short, don’t let filing a bankruptcy and tax season scare you off. Federal taxes will not necessarily hurt your case. A bankruptcy lawyer can help you get a fresh start and it is the best way to assure you don’t miss deadlines with the bankruptcy court, exempt property, and they can help you avoid bankruptcy issues.
Knowledge is what removes the fear and helps you get unfrozen!
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