What Happens with My Tax Refund If I File for Personal Bankruptcy?

When debt becomes unmanageable, many people wonder where they can turn for help. Filing for bankruptcy can help you discharge certain debts; however, the process itself is anything but simple. A common question we receive is, Can I keep my tax refund after filing a petition for a Chapter 7 or Chapter 13 bankruptcy?

To answer this question we first need to explain the differences between the different types of bankruptcy.

Chapter 7 bankruptcy aims to give the debtor a “fresh start.” Therefore, in Chapter 7, most of your debts will be discharged after a hearing with a court-appointed administrator. Chapter 13 bankruptcy offers an option for individual debtors to reorganize their debt obligations under a supervised monthly payment plan.

Deciding to file for bankruptcy is never easy. An experienced bankruptcy attorney can help you understand the bankruptcy process and give you the guidance you need to get through it. Whether you have questions about Chapter 7 or Chapter 13 tax refund rules, our team at The Law Office of Joel R. Spivack is here to help. The remainder of this page will give you an overview of how you might be able to keep your tax refund if you’ve filed for personal bankruptcy. 

Can the IRS Take My Tax Refund If I Filed Chapter 7 Bankruptcy?

When you file for Chapter 7 bankruptcy, you will use your current assets to pay a portion of your debts, and the remaining amount is discharged. The Chapter 7 trustee will collect your assets and liquidate them. The monetary value received from liquidation then goes into an estate to pay off your debts. Bankruptcy courts recognize that you earned the taxed income in a prior year before you filed for bankruptcy. Thus, your entitlement to the tax refund is an asset that will become the property of the estate. 

What Can I Do to Keep My Tax Refund in Chapter 7 Bankruptcy?

If you filed your taxes and are waiting for your tax refund when you file for personal bankruptcy, an exemption could potentially allow you to keep your refund. 

As disposable income, a tax refund qualifies as an asset in bankruptcy. Under 11 U.S. Code § 522(d)(5), bankruptcy filers can claim a wildcard exemption that allows you to keep a certain amount of your assets. You can use the wildcard exemption only if you did not use your homestead exemption. Thus, if you have already filed your taxes and are waiting for your tax refund, you can use the wildcard exemption to protect your tax refund from being counted as income on your plan.

Can the IRS Take My Tax Refund If I Filed Chapter 13 Bankruptcy?

The main outcome of a Chapter 13 bankruptcy is the Chapter 13 supervised repayment plan. 

The Chapter 13 plan allows you to make one monthly payment to pay off your unsecured debts within three to five years. If you comply with the payment plan, the court will discharge your remaining debt after the repayment period ends. The plan’s monthly payment will be based on your income after accounting for your living expenses, called your “disposable income.” Disposable income includes any income that is not used for reasonable and necessary expenses, such as food, transportation, and shelter.

Typically, the court considers a tax refund to be disposable income. If the court considers the tax refund to be a surplus, the Chapter 13 trustee, who is responsible for monitoring the progress of your plan, may require you to put the funds toward your repayment plan. 

What Can I Do to Keep My Tax Refund in Chapter 13 Bankruptcy?

You can exclude a tax refund in Chapter 13 bankruptcy by proving to the trustee that you need to keep the funds. This involves making a request to modify your payment plan. You should include the amount of your tax refund and the reasons you need to keep the money. 

In some cases, the court will allow you to keep the Chapter 13 tax refund if you show that you need the refund to pay for a necessary and unexpected expense. The court might agree to excuse your tax refund for the following expenses:

• Funeral expenses,
• Appliance repair or replacement,
• Car repairs,
• Down payment on a new vehicle, or
• Unexpected medical or dental bills.

If you encounter a necessary and unexpected expense, make sure you keep documentation that indicates the cost so you can show the court.

Alternatively, you could request that your payment plan exclude your tax refund automatically. However, the trustee and your creditors will likely object to the suggestion unless you provide a good reason for the provision.

Can I Keep My Tax Refund If I Haven’t Filed for Bankruptcy Yet?

If you receive your tax refund and you have not yet filed for bankruptcy, your tax refund belongs to you. Consider using the money for necessary expenses and avoid purchasing new assets. The Chapter 7 and Chapter 13 tax refund rules apply only when you have already filed for bankruptcy but have not either filed your tax return or received your tax refund. That does not mean you can delay filing your taxes past the deadline to avoid sacrificing your tax refund. 

Contact The Law Office of Joel R. Spivack for Information About Personal Bankruptcy and Tax Refunds

Joel R. Spivack has more than 30 years of experience practicing consumer bankruptcy law. During that time, he has helped more than 1,000 clients in the Philadelphia and South Jersey areas. Mr. Spivack has built a reputation of providing straightforward legal analysis to his clients, even in tricky and uncommon scenarios. 

At The Law Office of Joel R. Spivack, we respond personally and promptly to our client’s inquiries, and we aim to provide the most cost-effective solutions for any issues you’re experiencing. We treat our clients with dignity and respect at all times. Additionally, Martindale-Hubbell has honored Mr. Spivak by giving him the highest possible rating and recognizing him as an AV® rated lawyer. 

We know that filing for bankruptcy is a difficult process, but we are here to help you along the way. Contact our office today to set up your free consultation.